When Donald Trump wrote “The Art of the Deal” he became an industry authority figure for knowing or, at least claiming to know, how to make deals…deals that work.
Has anything changed since Trump wrote his 1988 best seller? Yes, a lot has changed. The fundamentals of deal making have not changed and perhaps they never will.
Making deals is one thing…now, however, the renewed skill that is most in demand is how to shape the deals we are making.
Due to today’s unique economic times, I’m discovering there is a big difference between securing signatures and shaping a deal for long term performance.
In fact, shaping the deal may be the requisite skill now in most demand because there are fewer deals to be done and the deals that are getting done require more perseverance and targeted thinking.
Negotiating Breakfast with My Daughter
Almost every day, we are all negotiating something. I did it this morning with my 9-year-old daughter. We negotiated about her breakfast. She wanted chocolate donuts, not one, but two! Once we formulated the premise for the sign-off, i.e., what each side wanted, we then had the core of the deal.
My position was clear. “You cannot have donuts for breakfast.” Her position was, “Donuts is the only way to make this deal work.”
Of course, like all parents, we often have to force the deal on our children, especially when it comes to proper diet.
My daughter knows the limits when pushing dad around. We have long ago established the negotiating framework. She opened the shaping phase of the negotiations with “So, Dad…you said no donuts for ‘breakfast’…that means I can have one if we don’t call it ‘breakfast’…we can call it desert from last night’s dinner.”
Suddenly, I was reminded of the power of “shaping” the deal, rather than simply “making” the deal.
The negotiations were shaped and the deal finalized after a healthy breakfast of fruit, scrambled egg and one strip of bacon. On her side, she got half a donut placed in her lunch box. She got some of what she wanted…I got some of what I wanted and what I know as a parent she needs.
Shaping Deals with Adults who Fight Back
There is a big difference between negotiating and shaping a deal with a kid over whom you have parental rights and authority and squaring off with adult negotiators who fight back and refuse to be shaped.
In the commercial real estate arena the principles of shaping the deal are the same. And here they are for you master negotiators:
- Understand the financial framework of the deal; your side and the other side. Clint Eastwood once said in a movie, “A man’s got to know his limitations.”
- Create points in time where you give the other side what they want. If you cannot surrender a point today, when might you and how might you at some point in the deal.
- Engage in trade-offs that are tangible and represent real concessions…people are not stupid, so be honest and don’t try to smoke and mirror the other side.
- Keep reminding yourself that you may never have another opportunity to shape the deal in front of you. In today’s complex market investors and tenants are fickle and may not return to the table.
Of course, some deals cannot be shaped. When the numbers do not work, they simply do not work, period. You cannot shape a $30 per square foot deal in a $20 market, usually.
What you can do is shape the transaction, its terms and cash flow in a number of ways to create transitional value in the down market so that in 3, 5 or 7 years your value position is closer to the desired financial end point.
Say “No” too early in the process is often going to kill the transaction for all parties. Replacing “No” with “Let’s look at this to see if we can make it work” is the first step in shaping the deal.
Shaping the deal will protract the cycle, increasing the cost of sale; time is money. There are few quick-close deals in my market. The limited deals take longer. The economy has created Principals that are decidedly more hesitant and methodical as they wind their way through the deal.
Shaping is becoming the new norm and the skill-set required is not easily found and maintained. We have been spoiled by the easy deals that were part of the 2000 to 2006 real estate boom. These are gone, perhaps for good. The bar has been raised and shaping the deal is often a more powerful skill than simply making the deal.
As capital drys up, the pace of investment slows and qualified tenant pools shrink. Engaging in the science and art of shaping the deal always made sense but now it is the critical element.
Shaping the deal is the new watershed.
Donald Teel is a Senior Associate and Principal with Arizona Commercial, an Arizona commercial real estate brokerage and property management firm, headquartered in Prescott, Arizona. Need more information? Please call 1-877-777-9100 or, if you prefer, you may email Donald Teel