Dalton’s three simple rules of dealmaking
September 24, 2017
"Man is an animal that makes bargains: no other animal does this—no dog exchanges bones with another." Adam Smith
Almost every entrepreneur will eventually be faced with an important negotiation. Often, that negotiation is to sell equity in the company to an investor or to exit. After reading this article, you will be prepared to better optimize the outcome of that negotiation, or at least to smile along the way.
The often-overlooked and under-rated 80's classic Roadhouse, like few movies before or since, distills the essence of achieving deal success (and yes, bouncing) into three simple rules. Dalton, the main character, played by Patrick Swayze, is a graduate of NYU in philosophy who curiously decides to become a "cooler" which is apparently some type of supreme stealthy Pied Piper of bouncers, capable of bringing peace and harmony to the world of bar room conflict, resulting in massive success for any bar he chooses to assist. As our hero stands before his newest group of bouncer-wannabes, he begins sharing his three simple rules.
One: Never underestimate your opponent. Expect the unexpected.
Remember, once you stop being nice, it can be hard, if not impossible, to go back to the initial relationship and reputation. People prefer to deal with people that are nice.
A mistake made by new dealmakers and seasoned veterans alike is to assume the opposing side is anything less than a team of negotiating superstars that can clean the floor with you on your best day. Often the person across the table simply appears to be acting recklessly, irrationally, or emotionally when in reality that person is a cunning and clever dealmaker attempting to drive the discussions in a particular direction. By being charitable and thinking a few moves ahead, you can better frame what it is your opponent may be doing and why, and more effectively counter their behavior or direct it in a way that gives you an advantage. It's the moment that you are confident that you have a bead on your opponent when you should be most careful.
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Expecting the unexpected is often what turns the direction of the deal. You will face proposals, moves, and walkaways that you were not anticipating. Far too often, a seller will start mentally spending the money before the deal is closed. When the other party unexpectedly starts packing up their papers suggesting they will walk, the seller suddenly starts making concessions and negotiating against himself or herself. It becomes difficult for the seller to back out of these internal mental commitments. Deals never go exactly as expected, and you will do yourself a great service by staying alert and expecting the unexpected.
Two: Take it outside. Never start anything inside the bar unless it's absolutely necessary.
For the dealmaker, the negotiating table is the bar. It is the place where the parties can get into positional standoffs, where arrogance abounds, and where individuals will engage in sub-optimal behavior to preserve their ego or perceived reputation. Starting a fight or taking shots at the negotiation table is generally ill advised and sends the negotiation in an uncontrolled and unpredictable direction. Instead, taking the time to walk away from the table and engage at a later point allows for a cooling off period and some time to think clearly. It disarms the situation and tends away from individuals needing to grandstand to save face. The essential business value of a deal is typically best left to be calmly, but assertively, negotiated by the business leaders on the sidelines without an audience.
Three: Be nice, until it's time to not be nice.
While this may be the third rule, it is arguably the most impactful. Stress, exhaustion, frustration, and emotions tend to run high during the deal negotiation process, and all are the enemy of good decision-making. Sometimes you face a near-uncontrollable desire to lash out, to express yourself, or to even the score. But none of that, unless done with a strategic purpose in mind, gets you any closer to a negotiated agreement. As Dalton says, "It's the job. It's nothing personal." Remember, once you stop being nice, it can be hard, if not impossible, to go back to the initial relationship and reputation. People prefer to deal with people that are nice. Setting a reputation to the contrary can follow you into your future negotiations.
So how will you know when its time not to be nice? Again, our hero provides guidance, teaching that, "You won't. I'll let you know." Your lawyer, to a degree, is an objective outsider with, hopefully, years of varied negotiation experience, and is often the one best suited to tell you when its time not to be nice.
Successful negotiation is very contextual, and every rule has an exception. Even two of the rules above have exceptions within the rules themselves. You'll learn from experience, but in the meantime, following the wisdom of Dalton will help you get closer to your optimal outcomes.
Craig Macy is Of Counsel in the Intellectual Property practice group at Fennemore Craig and advises a number of startups and founders in Reno as well as Silicon Valley. He can be reached at firstname.lastname@example.org.