Dear CEO, does your company also check the health of the transaction?
The recent changes in the global world have proven that companies that adapt and grow during times of crisis, are healthy companies.
What is a healthy company?
There are a few parameters that are being considered to answer this question.
According to a report from McKinsey which was published during 2017, a company's health is made up of three components:
How much the organization aligns around a common strategy;
How the strategy is translated into the working environment - that is, how well the company manages to execute its strategy; and
How much does the company innovate over time.
One can think of other parameters, such as the company's management, the company's financial strength, its growth rate, its intellectual property, product and service diversification, its risk management policy, its geographical, regulatory and competitive environment, manpower, technology, reputation and more.
Additional parameters are the company's ability to adapt to rapid changes such as the Corona crisis, and its ability to produce innovation.
In order to grow, a company must know how to generate transactions regularly and consistently, with a clear method and methodology that can be managed, duplicated, and measured.
The question is whether multiple deals necessarily help to create a healthy company?
The answer is no, as there can be bad deals that do not contribute to the company's health, and there can be good deals that are not good for the company.
And, of course, the company's growth rate may be too fast, and it will not serve the company in the long run.
So healthy deals contribute to the health of the company, and the question is what is a healthy deal?
The answer probably lies in the question of which parameter examines the health of the company, but a healthy transaction can be defined as one that meets three parameters:
It helps the company to fulfill its goals set by the board and management;
It increases the value of the company; and
It strengthens the company.
Companies that have a clear vision can add another parameter, which is that a healthy deal helps the company to realize its vision.
When the long-awaited deal arrives, there are a few parameters that are usually examined to check whether to pursue the deal, or in other words - to decide whether the deal is good for the company:
Financial / Economic: Pricing, profit, cash flow, revenue recognition, funding etc.
Company's Goals: Does the deal match the company's annual revenue target, the annual budget.
Business model: Does the transaction fits the business model of the company?
Risks: What are the risks in the transaction, and how are they managed? Have all the risks been taken into account and properly assessed?
Product/service and technology - what exists today, what needs to be developed, how much resources will be invested, would an initial investment be needed and more.
Operational - is the company's current workforce ready to support the customer, is there enough manpower to deliver the project, develop on time, comply with SLA?
Regulatory - Are permits and licenses required, such as the approval of the Competition Authority in M&A transactions, or a license from the Ministry of Communications.
But to examine whether the deal is also healthy for the company, additional parameters are required.
Whether and how the transaction helps the company to fulfill its stated goals:
Will the deal help the company to recruit additional customers and deals later?
Will the deal help the company to develop its next-generation flagship product?
Will the deal help the company to meet new constraints of the market, such as being able to deliver and support the product only remotely and not from the customer's site?
Does the deal fulfill the company's vision?
Does the transaction increase the value of the company:
Will the deal promote the company and help it get into a new hot field where it has not been active in the past?
Will the deal strengthen the company's story and its branding and reputation?
Will the deal help the company to become more innovative?
Does the transaction strengthen the company:
Will the deal create dependence on one major customer who will "strangle" all of the company's resources and prevent it from expanding and growing in the future?
Will the deal create too much dependency on one vendor, or one key employee?
Will the deal make a commitment to support an old company's product for a long period of time?
When talking about the strengths of the company, it is impossible not to relate to how the company manages its risks.
There are a few questions that arise:
Have all the risks really been considered and an organized discussion on the subject was held?
Will the deal allow the company to withdraw in case it finds that the working assumptions turned out to be incorrect, such as timely payments?
Are there enough protections for intellectual property? What about preventing sensitive data leakage? Is there a retention mechanism for key employees for the duration of the transaction?
So how can the company ensure that the deal that is executed is a healthy one?
There are two critical tools for executing a healthy transaction:
The contract, and the proper and wise use of the company's legal counsel.
In terms of the contract, a good contract and its proper use can be a tool that promotes the deal, helping not only to close the deal, but to close a healthy deal.
As far as the legal advisers are concerned, the involvement of the legal advisors and consulting with them at the very early and initial stages of the transaction, will help the company to identify and pre-neutralize all those mines that will come up in the advanced stages of the transaction, or which will occur after the transaction has been completed and which have not been taken into account.
These mines may prevent the deal from being closed or make the deal worthless for the company.
A deal that did not properly deal with the mines on time, is an unhealthy deal.
In terms of the contract, a good contract should accurately reflect the transaction, and be tailored to the specific transaction and include its details accurately. The contract can be seen as a user guide.
As a document that sets out and clarifies the details of the transaction, it shows the other party what is important to the company and what its boundaries are.
Using a contract at the early sales stage and not just at the final stage when all the commercial details are supposedly closed, will help to positively locate the mines and gaps between the parties in advance, and find common solutions to help close the deal to the satisfaction of both parties, and create a healthy transaction.
The following are some common gaps and mines that can be detected in advance by wise and early use of the company's contract and legal counsel, but there are of course many more examples:
The company does not transfer ownership of its intellectual property rights and grants customers a license to use the product, while the customer expects the intellectual property rights in the product to be transferred to it as it pays a large amount as a down payment at the beginning of the transaction, and for specific product developments which are made for the customer;
The company repairs defective parts and returns them to the customer's site, and the customer expects that faulty parts will only be replaced with new parts;
The company's policy is to provide a 30-day warranty, and the Customer's policy is to have a one-year warranty;
The company's policy is to grant limited licenses, and the client's policy is to have perpetual licenses;
The company's product is not considered as a mission critical system, and the SLA that the customer is accustomed to working with expects a mission critical system SLA;
The company's product is limited to specific territories and limited users, the customer is accustomed to worldwide use and unlimited users;
A condition for the success of the project by the company is the provision of a specific environment by the client, while the client is accustomed to everything being carried out and provided by the supplier.
As noted, there are many more mines and gaps.
Beyond locating the mines, there are two other great benefits to the proper and early use of the company's contracts and legal counsel:
Improving the ability of the company to negotiate by properly pricing the risks, and creating up-selling mechanisms, which can help the company to generate additional revenue from the same transaction / customer.
Many companies first close only the details that are perceived as commercial, such as price, payment terms and delivery dates, and only then discusses a contract that also addresses additional terms such as risk allocation between the parties.
In this case, the company makes it difficult for itself to negotiate, as it will be almost impossible at this stage to raise the agreed price to embody the risks, and thus the company will have to absorb the risks on itself.
In terms of smart mechanisms for creating up sales, a proper and early discussion of the company's contract can raise commercial points that are not always thought out in advance in the sales stages, such as the company's installation, support, and service policies.
And when discrepancies between the company's policies and customer's needs are revealed, the gaps can be leveraged to offer complementary service for the customer.
In addition, due to the contract discussion, other issues that may be seen as a show stopper may arise, and if these come up in the final stages of the deal they may jeopardize it, since each party is already locked in on the deal structure and in the advanced stages it will be very difficult to withdraw from this position (especially if the deal has already been approved by the company management).
For example, the client requests that the transaction will be closed with it's subsidiary, which does not have sufficient financial strength for the supplier. Identifying this point properly at the early stages of the transaction can help the parties to formulate a mechanism, that will cover the supplier's risks in working with the subsidiary, such as alternative payment dates or a parent company guarantees.
To summarize, healthy deals can be maintained with the proper, smart, and early use of the company's legal contracts and consultants.