By Younas Chaudhary
What is a hard out? A hard out is a line that you seldom cross, a deal breaker during negotiations. You have to identify your hard outs ahead of time on any deal that you are working on. And, if the other party refuses to budge on an issue for which you have a hard out, you have to walk away from that deal.
How do you do this after investing time, energy, money, and other resources? Here are a few tips including a case study.
Set a hard out, but be flexible on other terms.
When you work on a deal, it is hard to set a hard out on price or on other moving parts of a deal. So have a flexible mindset as you continue your negotiations. As you calculate your hard out on price, the most important thing to look out for is the Return on Investments (ROI) payout timeline. This varies according to industry. In oil and gas, you may want an ROI payout in 3 years or less considering the volatility of the energy market. In real estate, your timeline will necessarily be much longer. Besides the ROI payout timeline, pay close attention to other risk factors that you may encounter after entering and owning a deal. Is this a low-risk or high-risk venture? How about manpower, cost savings, and future yield? So set a limit on how far you can go in your negotiations, but also remember that flexibility is key.
Train your mind to walk away.
Once you have set a hard out on your non-negotiable area in a deal, try to stick to it. You may be flexible in other areas, but what is non-negotiable must be treated as such, or you will eventually cave-in to the other party’s demand. Here is a case study to show that, when you have a hard out that the other side is not respecting, walking away makes sense. Note that the numbers mentioned in the case study below are not the actual numbers and have been used for illustrative purposes only.
CASE STUDY: An oil and gas company had gone bankrupt just two miles away from an area where I have current oil and gas wells. The wells of the bankrupt company were sold via auction by its lender. The lender had set a minimum price of $1 million for the wells, as the lender recognized that it would receive at least $1 million in the current bad energy market. My hard out for this deal was $2 million. The bids soon reached $2.5 million. I expected the other bidder to budge. But they did not.
Remember, I began bidding with a hard out of $2 million but had a stretch goal in my mind of $2.5 million. Once it reached $2.5 million, it was time for me to walk away. The other bidder bought and closed the deal at $2.6 million. I was disappointed for a day or so but felt that my short-term loss for not buying this deal would help me in the long run.
So, why did I exit when I reached my maximum hard out? The reason is simple: I felt the ROI was insufficient, i.e., the wells would take too long to pay out and there were other foreseeable risks in the near future.
Get ready for obstacles with a hard out.
What is your highest priority in a deal? How can you accomplish that? And what is the hard out you are thinking of? While most deals are done collaboratively, there are some that might get competitive, and you will have to go back and forth on issues beyond numbers. For instance, if an oil property has a long-term, high lease rental obligation, this is going to impact your bottom line. As we discussed earlier, careful pre-planning can help you, but you will always find obstacles. Like any prudent businessperson, you must keep emotions away and recognize that you need to have a hard out to help you walk away.
Read documents carefully but make your own list.
Make sure you read all documents thoroughly as you think of having a hard out on a deal. In oil and gas deals, think about existing wells’ liabilities, unplugged wells inventory, cleanup liabilities, high lifting costs, decline rates, product sale agreements, condition of surface property, and so forth. It is also important to seek an expert’s advice in reviewing and verifying the backup data/information and to listen to their comments and suggestions.
Once you have decided on a hard out, make sure you also have a list of items and tasks that need to be negotiated. That means consistently writing down the list of issues to deal with as the negotiations progress.
Hold the line; but do not yield yet!
As a deal begins, it is an ongoing relationship between the parties involved. A hard out is like a bump in the road, a sticking point that you need to resolve with the other party. In addressing your hard outs, it is very important to convey your message clearly in non-confrontational language. You are going to have multiple hard outs across different areas while making any deal, but make sure that you do not inherit certain obligations. You must preplan and fully analyze different aspects of the deal; otherwise it will come back to haunt you in future years.
For example, if you are planning to purchase an oil and gas property and you find that the property has a rental compressor with a long-term high-price monthly obligation, it is prudent to renegotiate such items as quickly as possible.
Have a hard out for your life’s biggest purchases!
In my last four decades in business, what still surprises and baffles me is that ordinary people do not think of a hard out before buying their most significant purchases, like a car or a house. They think of only their monthly payment amount but fail to negotiate a favorable interest rate and loan term length on their car loan or home loan. Remember, most of these folks are educated people committing these ongoing blunders on a regular basis!
So, the next time you plan a major purchase, make sure to do your research, negotiate a lower interest rate, and secure favorable loan terms by having a hard out. Be curious, shop around, ask about lower interest rates and payment terms, and do not excessively focus on your monthly payment obligation. Always take your time and make every effort not to fall into the debt traps that slick car salesmen or home mortgage brokers put in front of you!
Find out more about me in my best -selling book “From dirt roads to black gold.” Note that 100 percent of the proceeds from the sale of this book will help people in need through my foundation, the YBC Foundation.
The views, thoughts and opinions expressed in this article are my own and do not represent the opinions of any entity whatsoever with which I have been , am now or will be affiliated.
The author does not warrant or make any representations concerning the accuracy, likely results, or reliability of the use of the materials on its website or otherwise relating to such materials or on any sites linked to this site. The author makes no warranties, expressed or implied, and hereby disclaims and negates all warranties including, without limitation, implied warranties or conditions of merchantability, fitness for a particular purpose, or non-infringement of intellectual property or other violation of rights.
Stay tuned to Tip 7: Be true to your lenders.