A VC in Vacationland

A fellow board member and friend of mine, Randall Pittman, Chairman of Chatham Capital Corporation and Forest Health Services, has an interesting piece of advice useful in many situations facing entrepreneurs.  At critical junctures in deals, whether selling or buying companies or products and services, he urges his teams to "find the Big No" and be able to deal with it.  What he means is that every deal has at least one major issue that needs to be resolved before the deal can be done, and that you better find and resolve those issues early in the process, or risk having to unfavorably renegotiate, or at worst, lose the deal.

For example, in the on-demand software space, the Big No is often from the CIO, who, late in the sales game, may announce that the company does not want any critical data or applications to reside outside their firewall.  For the sales team working with that client, getting to the CIO early and making sure he is comfortable with the SaaS environment is the best way of avoiding the Big No.

Early in my consulting career, I was working on the proposed Santa Fe/Southern Pacific rail merger. After years of research, we were finally in front of the (now defunct) Interstate Commerce Commission to present our evidence.  We had, we thought, huge amounts of data showing that the merger was not anti-competitive and should be approved.  The top lawyer presenting the case from Sidley & Austin was wrapping up his presentation, when one of the commissioners pointed to a map showing the mainlines of the two railroads and asked how could the Commission ever approve a merger of two railroads whose track systems so closely paralleled each other.  The Big No reared its ugly head, and our head lawyer gave a poor answer to an obvious question, dooming the merger.  A very embarrassing moment for the consultants and lawyers, and an expensive lesson for the railroads who had spent millions preparing for the merger hearings.

Finding the Big No in a deal situation may not be an easy task. Here are a few ways that I have used in the past to ferret out major issues early in a deal:

• Critical Issues Analysis–have your team make a list of possible objectors and their objections up front in the deal process, along with an action plan to ensure that they are addressed before they become a deal killer.
• Evaluate Past Behaviors–some people like to store Big No’s like chipmunks hide seeds for later use.  Their behavior, while not always predictable, can be observed by how they react in other situations. Ask around your company (or your deal sponsors if you are selling into another company) to determine if any executives exhibit this behavior and what are their usual hot buttons.  Past objections by executives often repeat themselves in new situations, or at least give you insights into a potential range of issues that may be raised.
• Ask–an obvious, but often overlooked approach, is to just ask key players if they have major objections to the deal.  They may ultimately behave like the chipmunk above, but at least you tried.