When should you walk away from a business deal?

In the high-stake world of business, deals are often framed as life-or-death decisions. The pressure to close can feel insurmountable, particularly when the stakes are high, and the future of your company hangs in the balance. However, there is no deal you absolutely have to do. No matter how tempting or necessary a deal might appear, the power to walk away is one of the most valuable assets you can wield.

When faced with declining revenues, shrinking market share, or looming bankruptcy, the allure of a deal can seem like the only path forward. It’s easy to convince yourself that signing on the dotted line, even under less-than-ideal terms, is better than the alternative of failure or insolvency.

However, deals made out of desperation are seldom beneficial in the long term. They often come with strings attached – onerous terms, unfavourable conditions, or partnerships that can jeopardise the future of your business. Once a contract is signed, it is almost impossible to rescind, especially if the reason for trying to break the contract is because you realise the terms aren’t as favourable as initially thought.

Understanding that you always have a choice, even if it means choosing to face bankruptcy, can prevent you from making decisions that could lead to even worse outcomes.

The cost of a bad deal

Accepting a bad deal can have far-reaching consequences that extend beyond immediate financial losses. It can damage your reputation, erode trust with stakeholders, and set a precedent that you’re willing to compromise your standards under pressure. In the worst-case scenario, a poorly structured deal can cripple your company more severely than the failure you were trying to avoid.

Take, for example, the case of companies that entered into unfavourable merger agreements or sold off key assets at bargain prices during times of financial distress. These decisions might have provided short-term relief, but they often led to long-term struggles, loss of control, or eventual failure.

In contrast, some of the most successful companies and entrepreneurs have thrived precisely because they refused to settle for bad deals, even when the alternative was bankruptcy. They understood that the wrong partnership or agreement could have permanent negative effects, while bankruptcy, as devastating as it may be, can also be a chance to reset, restructure, and emerge stronger.

The fear of bankruptcy looms large for any business person. It’s easy to view it as the ultimate failure, but this perspective is shortsighted. Bankruptcy is not necessarily the end; it can be a strategic move that allows you to regroup and rebuild.

In fact, many successful entrepreneurs have navigated bankruptcy not once, but multiple times. By allowing their companies to go through bankruptcy, they were able to eliminate unsustainable debt, reorganise their business models, and emerge in a stronger position.

This is not to minimise the consequences of personal or corporate bankruptcy, which can be significant, long-lasting and not to be undertaken lightly, but even with these consequences, it can be better than being tied into a terrible deal. Before making the decision, take advice from a lawyer who can advise you on whether it would be suitable in your situation.

The power of negotiation

The notion that you don’t have to accept any deal, no matter how desperate the situation, is a powerful negotiation tool. The best negotiators know that being willing to walk away is one of the most effective ways to ensure that the deal you do accept is on your terms.

Negotiation is often about leverage. When the other party knows that you’re desperate, they have the upper hand. But if they believe that you’re willing to walk away – even if it means facing bankruptcy – they’ll be more likely to come to the table with terms that are more favourable to you.

Moreover, walking away doesn’t always mean the end of negotiations. It can be a strategic move that forces the other party to reconsider their position. In many cases, a deal that seemed impossible can be restructured in a way that works better for both sides after one party has demonstrated its willingness to leave the table.

The importance of strategic decision-making

To cultivate the mindset that no deal is essential, it’s important to base your decisions on strategy rather than fear. This requires a deep understanding of your business, your market, and your long-term goals.

Here are some steps to help you make strategic decisions when faced with high-pressure deals:

1. Know your non-negotiables: Before entering any negotiation, identify the terms that are absolutely non-negotiable for you, e.g. ownership stakes, control over decision-making, or the direction of your company. Having these clearly defined will help you recognise when a deal is no longer in your best interest.
2. Assess the long-term impact: Consider the long-term consequences of the deal. Will it help you achieve your business goals, or will it create new challenges down the road? A deal that solves a short-term problem but creates long-term issues is not a deal worth making.
3. Explore all alternatives: Don’t let the pressure of a deal blind you to other possibilities. Sometimes, the best option is one you haven’t considered yet. Take the time to explore all potential paths before making a decision.
4. Consult with advisors: Sometimes, an outside perspective can help you see the situation more clearly. Trusted advisors can provide valuable insights and help you evaluate whether a deal is truly in your best interest.
5. Be prepared to walk away: The most important step is to be mentally and emotionally prepared to walk away from a deal, even if it seems like the last option on the table. Knowing that you have the strength to say no, even if it means facing difficult consequences, is a key element of successful negotiation and strategic decision-making.

Making the right decision for business

In the world of business, it’s easy to feel like you’re constantly being driven by external forces – the market, competitors, investors, or economic conditions. Alongside these factors, you also have to ensure the deal is compliant with the relevant laws and regulations of the governing jurisdiction.

Ultimately, the willingness to walk away is not a sign of weakness or defeat, but of strength and clarity. It’s the recognition that your business, your vision, and your integrity are worth more than any deal. And it’s the understanding that, sometimes, the best deal is the one you don’t make.

If you have questions or concerns about negotiating a deal, please contact Jaan Larner.