by JP James, Managing Director of Libreum Capital Management
I have been asked by more than one venture the question, what are the points that I need to consider whenever I put together a deal?
This is obviously a very broad question as it can pertain to anything, but I’m assuming that some of the characteristics are that it is some exchange of financial value between two parties where the goal is to create a win-win situation. Although I put the general terms together, I will ultimately utilize an attorney for formality of the deal and to review anything that I may have missed.
Here are the 14 points not to forget:
1. Use plain language.
More often that not I see deals that are filled with legalese and are impossible to really understand by non-legal personnel. If you don’t understand the flow of the document, don’t add it in
2. Understand what the other party is aiming for.
If you look at it purely from your perspective, and don’t understand the drivers of the other entity, then you are setting yourself up for a drawn out and high probability of failure situation. Simply by understanding the context of their situation you can set yourself up for success. Make sure you don’t go through this process limiting it based upon your situation.
Key questions would be: What does a win look like for the other party? What would be a above and beyond success for that party and what would be below their expectations?
3. Understand your deal limitations.
Obviously you need to clearly understand your situation and your cost benefit analysis so that you can go into the deal with a solid understanding of what is a huge success for yourself.
Key Questions: What is my threshold of what I’m willing to give up? What is a huge success for me in the terms?
4. Lock down rights and security.
No matter what you do, you want to make sure that in the process that you protect your intellectual property, have non-disclosure agreements in place, if possible non-circumvents. The key here is to just make sure that both parties feel comfortable doing business with each other and not feel threatened that the value that is being put together is not lost.
Key Questions: What do both parties need to protect to feel secure in understanding and completing the deal? What should I not show the other party that may compromise my position?
5. For Leads or Sales consider a Modified Lehman Formula.
If you have a deal that is related to bringing in sales and you do want to have a perpetual compensation you can use some version of a Lehman Formula that incentives the person upfront as they are bringing in revenue for you, then caps it off on an ongoing basis.
6. Balance the risks to your reputation.
When entering any deal you are putting your personal and corporate reputation on the line. Take into consideration what the impact of doing the deal will do to your brand.
7. White Label.
An effective way of generating cashflow without having to do all the sales and marketing effort of a deal is being able to license out your value, but having someone else’s name on the product or services. The key though is that they are not able to potentially steal that value at a future point in time, and that you have the ability to continuously increase the value of the offering as time goes forward, otherwise they will considering moving away from you or potentially competing against. That is why pricing structure is also very key, such that it is competitive over the long term.
8. Hand-off Sales.
You may be putting an agreement together that enables a company that is getting a lot of leads for you or vice-versa to then hand off the sales. In these scenarios you need to understand the effort and value of the relationship. Usually a straight commission is sufficient in order to turn over the quality leads that are being generated. The key is how much effort does it take to make the referral.
9. Lead Generation vs. Closing.
In many industries there is a significant difference and effort that is taken for bringing leads to the table versus the actual closing process. Usually there is a finders fee that is lower than a Third Party Marketer who is doing all the work to actually close the deal. They should be compensated significantly different.
10. Wholly-Owned or Partially-Owned Subsidiary.
Certain deals may have an advantage in relation to who owns what entity. If the brand is very strong and they want to lend that credibility to another company there may be consideration of a very small purchase of stock which would allow for the statement of being Partially owned by the higher quality or more visible brand. Being wholly owned has the same effect, but it does obviously require a merger or an acquisition to occur. Many Berkshire Hathaway companies utilize this position as an advantage.
11. In Advance vs. Arrears.
Payment terms can always be a sticky point based upon who has the advantage and who is taking on the risk. The key is to minimize any cashflow disconnects from when the sale is made and when the payouts are being made. Each industry is different, but product based industries may have a disconnect with larger wholesale relationships, therefore payment in advance or arrears is extremely important to understand.
12. Due Diligence.
No matter who it is that you are doing business with, you need to absolutely hire independent parties to complete due diligence on the other party such that there are no unnecessary risks that are taken or there are issues that are uncovered in the future that can put the entire relationship in jeopardy. Background checks and forensic accounting specialists may be something to consider.
13. Leverage Points.
More important than most items, understanding what is in it for me and for the other party is probably the most important factor in determining the amount of value that you can provide for the other entity. Having positioned and create an atmosphere of advantage is critical for lasting value.
14. Environment Open for Negotiation.
Never create a situation where you can not walk out the door and have more time to think and make a decision. Putting yourself into a precarious time position is asking for long term damage if you were to make a decision under the gun.
As senior partner in Libreum Capital Management, JP James helps set the strategic direction in the diverse set of financial companies including alternative investments, private equity, risk management, investment banking focused on multiple verticals including medical, wellness, fracking tech, entertainment tech, and others.
