All Counterparties Aren’t Created Equal

A lot has been written about the mechanics of various parts of the deal process.  One simplifying assumption that’s often made is that all counterparties are equal – particularly buyers – and are separated solely by the financial and legal terms they propose.  However, looking at counterparties blindly – just based on their term sheets – robs you of some critical information.  The qualities and characteristics of a particular buyer can have a big impact on the final outcome of a transaction.

Here are a few things to consider when evaluating a counterparty alongside their bid or proposal:

• Must have versus nice to have.  How much do they want this deal to happen?  Are they fully committed to the outcome (acquiring a certain asset or capability or selling a certain business)?  Weaker commitment can translate into a harder negotiation, worse terms and even a broken deal.
• Alignment of wants.  Transactions are never net zero gains.  There are a range of non-price variables on which each side will have a view.  Finding a counterparty who wants what you don’t and doesn’t what you do, will create greater shared value.  For example, a buyer who highly values ownership of the brand is a better match for a seller who doesn’t want to keep the brand.
• Track record of close.  Repeated transactors generally develop a set of behaviors around doing deals (that sometimes emerges as a brand for them – for good or ill).  Formally, or more likely informally, you want to try and gauge the other sides ratio of initial interest to term sheet and of term sheet to close.  A seller would prefer a buyer who has a high ratio of offer to close versus one who has a track record as a looky-loo.
• Pre-existing expertise.  The diligence process is a discovery process that changes and evolves a buyer’s perception of the asset.  Similarly, the sale process and choice of buyers requires a seller to think about the consequences of a sale.  In both cases, a counterparty who is more knowledgeable about the market, customers and competitive landscape is less likely to experience a ‘surprise’ in the deal process that will lead them to walk away.  Of course, the counter is that the more knowledgeable a counterparty the better they may be able to negotiate.
• Quality of advisors.  The legal and financial advisors of a counterparty can be massively impactful on the deal process and even outcome.  As with pre-existing expertise there’s a trade-off.  Great advisors will advocate perhaps more effectively for their client but will also drive an effective deal process.  I’ll always take a more effective counterparty advisor who also knows how to get a deal done and what real ‘market’ is for any component of their work.