Seven Critical Deal Skills
Why Deal Skills Matter in Tech Transactions
a boutique investment banker specializing in selling technology
companies, I have long pondered what key deal skills lead to successful
transactions. Over the years, actually 23 years, that I have been
structuring deals, I have come up with a brief list of the consummate
deal skills that can be applied across any industry or sector.
deal skills are manifested by the outcome of a transaction: First of
all, the deal gets closed. The client gets the best price, typically by
getting multiple offers. All the best buyers are contacted, especially
the non-obvious ones. The transaction gets back on track after it
breaks down. (Forty percent of all deals blow up at least once.) The
deal gets completed smoothly, with fewer problems, fewer delays, fewer
arguments, fewer hassles and in a reasonable time frame.
questions that I am often asked are: “What sectors have you worked in
lately?” and “Have you ever done a deal in the XYZ industry?” This
leads me to believe that tech CEOs and venture capitalists think that
industry knowledge or contacts are all that matter. On the contrary,
deal skills are far and away the most important component of closing
the sale of a technology company.
Industry knowledge certainly
is a good thing; however, it can be learned. With a week or two of
diligent effort, you can get fairly up to speed in any industry sector.
Study industry reports, talk with a handful of CEOs, read the trade
press, view industry web sites, and you will know what is going on. And
making the right contacts is a fairly straightforward process.
it comes to getting a deal closed at the best price and with the least
problems, these seven deal skills will beat industry knowledge every
day of the week.
Seven Critical Deal
1. Listen Between
Listening between the lines means not just hearing what the person is
saying, but understanding what the person really means.
principals meet, they rarely listen well. They are thinking about what
they are going to say next, rather than really hearing the other person.
is the ultimate deal skill. You can't get someone what they want if you
are not sure what it is. You cannot overcome an objection if you don't
understand it clearly. A skilled deal person understands exactly what
each side wants to achieve.
2. Know How to
Identify the Non-Obvious Buyers.
down on the core market is the easy part. The selling company can
probably come up with a list of 10 to 20 buyers without too much
trouble. These are the easy ones, the obvious candidates. An important
deal skill is knowing where to find the less obvious buyers.
best buyers may be in markets that are adjacent to the core market.
Understanding the importance of adjacent markets is critical because
they may be the most fruitful places to look for buyers. Buyers in
adjacent markets will often pay the most because they will use
acquisitions to enter a new market. The nuances of markets, especially
at the edges, are where the real action is.
For example, last
year I sold an email direct marketing firm. It creates and emails
newsletters and weekly updates for its corporate clients. This business
touches on a number of adjacent markets—advertising agencies, direct
marketing firms, Internet advertising companies, marketing research
firms, customer relationship management firms, and interactive
marketing firms. Companies in each one of these market sectors were
good potential buyers.
3. Read People.
great deal skill is reading and understanding human beings. What kind
of person are you dealing with? What is their level of risk tolerance?
What kind of communicator are they?
Consistent patterns emerge
among people. Recognizing these patterns can be helpful in working with
someone new. What is their communication style—is it direct or
indirect? Do they have the courage to face tough issues or do they shy
away from them? An experienced deal person is flexible in dealing with
different personality types.
A good deal person will see through
the stated objection to the real objection. People don't always tell
you the real reasons for things. They even get their own objectives
mixed up. They can be insecure. Sometimes they have to save face.
Knowing how to read people is a consummate deal skill.
way, the best deal people are not generally technology people. The
skills that make a good engineer, programmer, or inventor are not the
same skills that make a good deal person. Tech people are usually
smart, highly analytical, logical, and can focus acutely; but they are
usually not good at putting themselves in the other person's place,
understanding their motivations, and relating to the other's point of
4. Perfect Your
trading embodies a number of skills. It involves give and take, feeling
out the other side. How to go back and forth with offers and counter
offers is an important one, knowing whether to come back with a little
or a lot. Even the tone of the reply is important.
negotiating expertise? Is it toughness? One who never budges? No, that
is not necessarily good negotiating. Good negotiating skills involve
having a sense for what you can achieve, knowing how to effectively
work with the other party and reaching an agreement.
clearly is a key part of negotiating. Good communication skills help
build trust on both sides and keep objectives clear.
skills are particularly valuable when the value is intangible—when
there is no concrete basis for value, which is usually the case in
technology transactions. And remember, you don't just negotiate price.
Terms can be every bit as important.
5. Apply Creative
there were no problems, deals would simply go together all by
themselves. The best way to solve deal problems is to understand the
issues clearly and to employ creativity in developing solutions.
good deal person distinguishes between real problems and phantom
objections that are designed to push the price down. He knows how to
make some problems go away entirely and minimize the other problems.
because the seller says he wants cash, doesn't mean you shouldn't
consider stock. What if the deal came down to a choice of $5 million in
cash or $11 million in stock? Now would you consider stock? It depends,
of course, on who the company is, but do not dismiss it out of hand.
can solve a lot of problems, in unique ways. There are rarely just one
or two ways to solve a problem. A clever deal doer will come up with a
range of acceptable alternatives. Most of the time when deal problems
create an impasse, it is because the parties are not thinking
In one instance, I closed a deal that was
technically a marketing agreement. The customer base was the primary
asset, so rather than go through the problems associated with
transferring stock or assets, the transaction structure simply involved
paying for the customers as they migrated to the acquiring company.
This was an unusual structure, but it was very simple and very
6. Pace the
a company is like a slow dance. Managing the pace of a transaction is
an art. You can control the timing to your advantage. Know when to
push, when to back off, move it quickly or slow it down. There is —a
rhythm to every deal, a cadence.
You can always slow the process
down but you can rarely speed it up. A lot of CEOs want to go, go, go,
push, push, push. Being proactive is one thing, but being impatient is
another. This is not a good way to pace a transaction. Patience is a
powerful deal skill.
A key to achieving the best price is
getting multiple offers. However, receiving multiple offers doesn't do
much good unless the parties show up at the table at the same time. You
can't say— “Just a minute” and get back to them two months later. An
experienced deal doer will manage the pace of a transaction to the
client's advantage, using subtle deal skills to get the parties the
table at the same time.
7. Structure the
a transaction appropriately can make the whole process productive and
successful. The key to good structuring is knowing what kinds of things
are workable and what are not. A good deal person can be inventive and
create structures that meet the needs of both parties.
variety of issues crop up during the deal process. For example, should
the Letter of Intent be binding or not? What about certain paragraphs?
What length of a no-shop clause is reasonable? Experience and judgment
can pay huge dividends handling the many minor issues that can cause
stumbling blocks along the way.
Many deals have been structured
as earnouts that should never have been structured that way. Sometimes
earnouts are great, but they can also be awkward and messy. An earnout
should be used when it is the appropriate structure, not because the
parties simply can't agree on price. Smart structuring solves the needs
of both parties in the simplest possible way.
For example, one
selling company wanted to use an earnout as a way to boost the purchase
price. The company had been in business for 20 years. Its business
model was well-proven; it was hardly an unknown. So an earnout was
totally inappropriate. It would have made the deal unduly complicated.
deals get completed. However, in my experience, many of these
transactions are not structured optimally. With a little creativity and
a better understanding of the parties’ objectives, a good percentage of
these deals could have been structured more intelligently, so that both
parties would be better off.
A few additional tools that are good to have in your bag of tricks:
1. Sniff Out Tire Kickers—Figure
out if the other party is serious. You can waste a lot of time and
energy dealing with buyers that are not serious.
2. Keep Plan B Alive—You
should always have a backup plan. Keep your alternatives warm.
Sometimes Plan C is a good idea too.
3. Know How to Approach Buyers—It
is important to approach buyers effectively so they will commit the
time and effort to explore an acquisition. Who should you contact at
the buying company? What about confidentiality? Should you provide a
lot of information up front or only a little?
4. Communicate Effectively—Clearly
communicating a company's strengths and opportunities is a very good
skill. Why do customers pay good money for the firm's products or
services? Exaggerating is not a good idea; it will come back to bite
5. See Value Through the Buyer's Eyes—Determine
how valuable the company is to the buyer. Try to view value through
their mind set. What would it cost them to duplicate what the seller
6. Manage Expectations—Manage
the emotions and expectations of the parties—the CEO, founders, VCs,
shareholders and employees. And, to a degree, you can also manage the
expectations of the opposing party.
7. Foresee Problems—Know
where problems might crop up and which roads not to go down. The wise
deal person heads off issues before they become real problems. The
easiest objections to overcome are the ones that never come up.
a deal can be an uphill battle. The tenacity to keep on pushing,
persisting until you succeed, can make all the difference in getting a
skills are about interacting with those pesky creatures called human
beings, with all their quirks, biases, egos and emotions. Deal skills
result from experience. You discover what works and what doesn't work
by trying things out, by interacting with different types of people and
situations. Effective deal skills are truly an art that can make all
the difference in completing transactions at the best price and with
the fewest problems along the way.