Adatree’s Jill Berry on how to spot red flags in business deals

There’s a hunger that every startup founder understands: the need to be understood and taken seriously by industry peers, partners and clients. But when a fledgling business is extending themselves to grasp a steady revenue stream, there’s one skill I believe founders should hone to balance this hunger: the art of knowing when to walk away from a deal.

I recall a piece of wisdom from my old boss Peter Haig, the co-founder of Tyro Payments: “Not every customer is a good customer, and not every partner is a good partner.” It’s something I think about when deciding who to do business with so that I’m clear-eyed when I evaluate an offer.

Three common red flags

1. Cheap but high maintenance

   The customers and partners we try to steer clear of are those who are high maintenance but like to lowball on payment. Usually, they negotiate hard on price and/or request a lot of inclusions and customisations. So you’re either being paid less or you’re constantly bending over backwards to accommodate them — or a nasty combination of both.

   One of my favourite sayings is “companies die of indigestion, not of starvation”. In this case, think of the opportunity cost: if you are prioritising this client, what other parts of your business are being neglected? To what end? Being able to spot a cheap but high-maintenance partner and walking away before you’re in too deep or the relationship sours is a useful skill.

2. Take but no give

   If a partner is more concerned with what they will get from a deal, particularly if it’s highly favourable for them, that’s a red flag. It means they haven’t taken your requirements or values into consideration.

   Real partnerships should be mutually beneficial, complementary and have a foundation where each party is equal. If there is unequal footing in the relationship — or if their behaviour indicates they’re incentivised to get the better end of the deal — that’s an unhealthy dynamic. Trust your gut instinct. If it doesn’t feel mutually beneficial, listen to that instinct. Have some confidence in your startup and say no to unbalanced deals.

3. All-in too soon

   If a partner is being aggressive and won’t compromise or negotiate, that’s a red flag. We had one situation where a company started off very contract-heavy; they wouldn’t even associate with us until we signed a contract. Then they went from talking about revenue share straight to ownership of our business. In one light it was flattering that they believed in our company, but once they learnt we weren’t open to them owning our company, the dealmaking stopped — but I felt a lot better.

How to spot a bad deal

Of course, you need to do your due diligence before you sign any contracts but you can usually tell something’s not right well before you invest time and effort in that process.

When you have a meeting, bring along someone you trust to provide a sense check. Even better if it isn’t someone directly involved in negotiations who is then free to observe. Afterwards, hold a debriefing to collate everyone’s feelings about whether it went well or badly.

Learn to trust your gut. Your instincts are rarely wrong. As startup founders we like to give potential partners the benefit of the doubt because it can be challenging to get a feel for people when you’re meeting over video conferencing and we know it takes time to build trust and get transparency. But using your gut as the first gatekeeper can save a lot of pain, heartache and time in the long run.

Fortunately, this process becomes easier as you become more experienced because you’ve identified what you want from a partner and a deal, and you’re more attuned to the red flags so you can save time by walking away earlier. Now that we have a range of clients, we know what a good relationship is and what a bad relationship is so we can seek more suitable partners. It turns out that asserting yourself — and being allowed to assert yourself — is the best indication of what to expect from a deal going forward.