Term sheet negotiations are rarely easy, and there are multiple ways negotiations can break down before a deal is reached. Like many things in the biopharma industry, a big success factor in successful term sheet negotiations is effective communication. Below are some common pitfalls to avoid during the negotiation process.
Playing cards too close to the vest
Whether you’re the buyer or the seller, it can often be helpful to provide early deal guidance to your potential partner(s) in a negotiation to ensure everyone is on the same page. Sellers are often reticent to provide too much information to prospective buyers about what they are looking for from a deal, fearing that they may constrain value. Although decisions need to be made on a case-by-case basis, there is often greater value in providing specific guidance to a buyer on deal structure, and even specific terms, than there is in waiting for the buyer to make the first move.
True to the scientific method, Locust Walk has advised on more than one deal process wherein, for various strategic reasons, some partners were given numerical deal guidance and others were not. Perhaps not surprisingly, parties who were given specific guidance generally submitted significantly higher-value term sheets than those that weren’t. These anecdotal observations are also supported by more rigorous research, which has shown that anchoring deal value early is generally a path to a better deal value 1,2. The bottom line is that it’s usually easier to guide a partner to the right range from the start than it is to significantly improve a low-ball offer after the fact.
Similarly, on the buy-side, buyers can improve their success rates by approaching potential targets with a non-binding offer already in hand. Though doing so requires some upfront work at risk, coming armed with a term sheet, or at least being prepared to submit one quickly after introductory discussions, enables both parties to quickly and mutually get to a go/no-go decision and potentially clears the way for fast and efficient deal execution.
Submitting a proposal in a vacuum
A critical and often overlooked element of an effective proposal is providing explanation and context to accompany the proposed terms. Practically speaking, this should take the form of an effective cover letter and/or accompanying slides rather than (or in addition to) verbal explanation, since term sheets are likely to be broadly forwarded to other parties. The goals of the accompanying content are to provide clarity around the principles underlying the proposal as well as to sell the potential partner on the attractiveness of the deal. The latter is especially important for smaller companies on the buy-side who need to convince the seller that they are a partner of choice (see our previous post on that topic).
Providing rationale and justification becomes especially important when submitting a counter to an existing offer. Arbitrarily asking for more money without explanation sets the stage for a non-productive and positional struggle which is less likely to result in finding common ground. Conversely, explaining a defendable rationale for why your counterproposal is justified provides a platform for further discussion, and is more likely to lead to a deal. As deal discussions advance, this rationale and context is best delivered via an in-person meeting, as face-to-face explanations are generally a more effective method of generating mutual understanding than red-lined documents.
Failing to understand key sensitivities (yours and theirs)
When responding to a term sheet (or term sheet guidance), there is often a temptation to push back aggressively to add as much value as possible to the deal. While it’s natural and correct to want to optimize your deal value, in most cases negotiators will need to pick their battles, focusing on moving the elements of the deal that matter most and conceding others. Of course, doing so effectively requires that management has aligned around key goals and sensitivities – an important success factor. As in many aspects of business development, a deal strategy is most effective when driven by a well-defined corporate strategy.
Similarly, if the negotiating partner has followed similar best practices in communicating their key goals and non-starters, it will be easier to find the deal elements which can be pushed further and those that can’t. The danger with every counterproposal is that pushing too aggressively can kill the deal by triggering a walk-away.
Playing “ping pong”
Another often-made mistake during term sheet negotiations is conducting too many rounds of counterproposals. A key reason that deal discussions can break down is “deal fatigue”. Everyone has their breaking point, and after multiple rounds of negotiation, especially if no significant progress is being made toward an agreement, it is likely that one party or the other will walk away from the discussion. That said, if the above communication principles have been applied throughout, it should be possible to come to a meeting of the minds with just a few rounds of back and forth. Finally, it’s important to keep in mind that term sheets are typically just a first step toward a definitive agreement, and it’s OK to leave some issues for later discussion.
By using a clear and effective communication strategy throughout the negotiation process, many common pitfalls can be avoided and the chances of successfully reaching a deal can be maximized. Locust Walk has a lot of experience navigating these and many other pitfalls, and has a strong track record of success in helping to find common ground with negotiating partners. If you’d like help with navigating your own negotiation process, please contact email@example.com to discuss how we can help.
1 “What is Anchoring in Negotiation?”, Harvard Law School Program on Negotiation
2 Getting to Yes by Roger Fisher and William Ury