Understanding deal fatigue in business transactions

Deal fatigue is very common in commercial transactions in Australia because of the complexity of the law and the sheer volume of documentation that’s often required.  An unfortunate consequence can be that benefit of entering into the deal in the first place can be watered down to the extent that the deal becomes unpalatable.   This article will discuss the symptoms of deal fatigue and offer some tips on avoiding it.

So just what is deal fatigue?

We define deal fatigue (Deal Fatigue) as the lessening of a party’s patience and enthusiasm to proceed with any sort of commercial transaction because of the inclusion of onerous commercial terms in the contracts that result in the less dominant party accepting terms which don’t reflect its initial intentions.

Deal Fatigue is also prevalent in litigious matters where overly vigilant solicitors for a party document the terms of a settlement deed over a protracted period simply because they are keen to get the best result for their respective client.

The common element is that solicitors for a party have an obligation to act in their client’s best interests.  This involves a forensic judgement by the parties solicitor of what this best interest is.   For example when presented with a contract to enter into a reseller’s agreement, the solicitors for the recipient mark up the document to include an indemnity in favour of their client when a loss is not anticipated.   Alternately they include a series of penalties or discounts in the event of late delivery of product.   On its face these things may be in there clients best interests however by adding these sorts of clauses (among others) they are increasing the time taken to enter into the transaction and increasing its cost.   In some cases the solicitors for the recipient can reverse the intent of the entire document by changing a few words which then has the effect of protracting negotiations in circumstances when the deal was done.

Deal takers versus deal makers

Entrepreneurs and marketers see opportunity everywhere.  Consider the situation where a manufacturer of trailers in Australia was approached by the patentee of a unique product for a boat trailer to see if they wanted to manufacture and sell the products associated with the patent.   The deal maker (Deal Maker) in this case is the patent owner and the deal taker (Deal Taker) is the trailer manufacturer.  The Deal Maker needs someone to manufacture and distribute the product according to its specification.   Each party can provide something to the other that they cannot do on their own.   The difference between a Deal Maker and a Deal Taker is really defined by who ‘initiates’ a proposed transaction.   If the situation was that the manufacturer sought out a licence to manufacture from the patentee then the roles and the labels that are applied to each would be reversed.

Broad stages of commercial transactions

Regardless of the nature of the transaction and which party acts as Deal Maker and Deal Taker, a commercial transaction will likely go through the following broad stages:

• Ideation – the Deal Maker comes up with the idea for two or more parties to benefit from an arrangement (Deal);
• Approach – the Deal Maker approaches the Deal Taker to introduce the broad concept of the Deal;
• NDA’s – the parties exchange confidentiality agreements (NDA’s) – although not always;
• Commercial terms discussed – who does what and how much is paid;
• Legal due diligence – the parties engaged in some form of legal due diligence into the other;
• Accounting due diligence – the parties consider some financial due diligence
• Term sheet – the parties document the broad commercial terms in the form of term sheet or memorandum of understanding (MOU); agreement on broad terms;
• Contracts prepared – lawyers for one of the parties drafts the contracts;
• Contracts reviewed – recipient reviews the draft contacts;
• Contracts amended – the recipient negotiates some changes to the contracts;
• Contracts finalised – parties sign the contracts; and
• Deal proceeds.

The broadly process applies to raising capital, commercialising a product, selling a business or entering into some sort of joint venture.  Of course, each case will be slightly different and the nature of the transaction itself will also depend on the Deal that may be struck.   That said the above process can be broadly applied to most commercial transactions.  With that in mind, what can go wrong?  If the Deal is in both parties interests so how does Deal Fatigue figure into the process?

Factors to apply to the broad stages of a Deal

In pursuing a Deal, the Deal Maker wants the Deal Taker to do something for them and will be prepared to do something in return.   In simple legal terms this is offer and acceptance and consideration.  Believe it or not, not all Deals initiated by a Deal Makers proceed, just like not all sales pitches result in sales being made.  Initiating Deals is somewhat more complex than making a sale because the features and benefits of a product or service are predefined whereas they can be created as part of a Deal.  When a Deal Maker initiates a Deal the following factors can be considered to maximise the chance of it proceeding:

• Resources – the relative financial resources of the parties;
• Deal Importance – the size or relative importance of the Deal to each of the Parties;
• Relative Bargaining Position – whether one of the parties has to do the Deal;
• Introduction of Lawyers – the point in time when the lawyers for the Parties have input into the Deal;
• Contract Drafter – whose lawyer is drafting the Contracts?;
• Legal Sophistication of each of the Parties; and
• Deal Planning – Not having a plan for how the transaction should proceed.

Resources of the parties

Where one party to a transaction is not under any financial pressure and the other is, it can create an imbalance from the outset.   One party can take as long as it like to complete whereas the other may be under a time pressure.    The result is that one party takes its time and the other may agree to almost anything simply because it’s under significant time pressure.   The unfortunate reality in a lot of commercial transactions is that the parties know of the each others financial position and use that knowledge to the others detriment.

Tip: Include a time limit and other factors such as non-exclusivity that create competitive tension in the Deal early on during the process.

Deal Importance

If the Deal is critical to the Deal Maker, there is no reason (provided that no representations are made that could be held to be misleading and deceptive) that its importance could not be downplayed.   Initiating multiple Deals reduces reliance on just one deal.   If a Deal Taker wants exclusivity then it makes sense to impose a time limit as well as making them pay for such exclusivity.

Tip: Avoid the situation where there is only one Deal on the table and create competitive tension.

Relative Bargaining Position

The relative bargaining position is a function of the parties financial resources and the how much the other party wants what the other will provide.    In the trailer manufacturer example above, if the patentee is desperate to get distribution of its product from the Deal Recipient then their power to influence the terms of the transaction will reduce.   The Relative Bargaining Position of the parties is a function:

Tip: Take active steps increase your Relative Bargaining Position by, initiating multiple Deals simultaneously (if possible), avoid needing the money, ensure that each Deal has to proceed at a timeframe that suits your business not the Deal Taker.

Introduction of Lawyers

Of course the point that it is best to introduce Lawyers into the Deal will depend on its nature in the first place.    That said we consider that its worth consulting your lawyer at the outset about the nature of the Deal and ensuring that you include as many considerations as possible in the Commercial Terms so as to avoid the Deal Taker getting shocked by the volume of the contractual documentation (Document Shock) when it is delivered.  Introducing your lawyer at the point that you receive the Contracts is perhaps too late in the process because if they were introduced earlier it may be possible to minimise the inclusion of onerous commercial terms in the Contracts that can result in Deal Fatigue.

Tip: Talk with your lawyer about the sorts of commercial terms that should be included in the Contracts and ensure that these terms are brought to the attention of the other party.   Regardless of whether you are a Deal Taker or Deal Maker this can be important in reducing Deal Fatigue.   The higher the value of the transaction the earlier you should discuss the broad terms with a lawyer.

Contract Drafter

Regardless of the type of transaction the tendency is for the lawyer for the party with the greatest resources to draft the contracts.   Unfortunately there is no set rule.   One common fallacy is that it will cost less if the other side’s lawyer draft’s the contracts.   Nothing could be further from the truth.  More often than not it costs more to review and negotiate amendments to a contract because they include overzealous and onerous clauses that were never contemplated by the parties in the first place.

Tip: If it’s your Deal your lawyer should draft the Contracts.  It’s a false economy to think that you’ll save money by allowing the Deal Taker’s lawyers to draft the Contracts as its often takes more time (and more in legal fees) to negotiate the removal of onerous clauses that to draft the Contracts in the first place.

Legal Sophistication

Where one party is a large ASX listed corporation, then it’s a reasonable assumption that they are used to negotiating and documenting contracts.   Contrast that with a start up that is trying to initiate it’s first Deal.   The process and actions of each party may seem strange to the other.  The ASX’s listed corporations use of its lawyers may seem very odd to the start up despite the value that they could be getting from the proposed deal.

Tip: Work with your lawyer to understand the process and develop a plan for the proposed Deal.  Consider also having a proforma process to tailor to each Deal depending on the circumstances.

Deal Planning

Consider again our example of the Patentee of the addition for boat trailers.  At the time that the product was developed its likely that the manufactures and distributors of the products could be foreseen and considered against the costs of distributing direct.  The timeframes and limitations associated with the patenting process are also known.  Because of this it would be possible to develop a Deal Plan that addresses the major stages of the Deal and increases the likelihood that it will proceed.

Factors such as timing can be balanced with cashflow and exclusivity can be balanced to reduce reliance on the just one (1) Deal.   In short the factors of unequal Resources, and Bargaining Position and Legal Sophistication can be addressed in a Deal Plan.   You can also budget for your lawyer to act as the Contract Drafter and reduce the time taken by considering and addressing all of the commercial terms of the Deal at the outset.

Tip: When done well, Deal Planning goes a long way to reducing Deal Fatigue and increasing the likelihood of a Deal Proceeding.

The obvious symptom of Deal Fatigue is protracted negotiations caused by multiple versions of a Contract that contain terms that the Deal Maker did not contemplate.  The final result may be that a party throws their hands up and says “I just want it over!”    This situation should be avoided at all cost.

Further information about deal fatigue

If you need advice on reducing the likelihood of Deal Fatigue or negotiating the terms of a Deal, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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