Q: Where’s the relationship between people and finance?

A: Here’s a quick story about a case I had at Kellogg in an upper level finance class.

We were given a case, in which a sixty-year-old son was to take over a company from his father, an octogenerian and depression-era baby. The son had ideas for expansion and wanted to finance those plans with debt; the father was luke-warm about these plans and wanted to do them with equity if at all. The question was, which way to go: debt or equity?

In theory, the company should have been indifferent, but slight variances in tax rates led one to favor debt, albeit slightly. Every group got the numbers right, and all but ours recommended going with debt based on this financial analysis. My group recommending financing the deal with equity, in spite of our financial analysis. We couldn’t justify our recommendation, and we were nearly lynched during the case debrief by our fellow classmates for being so obtuse.

Ultimately, the lynch mob was brought to heel by our professor, who told us all how the story played out in reality: the company financed the deal with debt and within a year, the deal had fallen apart, the son had been relieved of his duties, and the dad was back at the helm. Here’s what the financial analysis overlooked:

1. The dad was a control freak. This was suggested (strongly) by his extreme reluctance to turn his company over to his son. I say “extreme” because the hand off was coming when the son himself was approaching retirement age… one would think that the time to pass the business down would have been about 20 years ago.

2. The dad was anti-debt. He was a depression-era kid! Think cash under the mattress, cash hidden in coffee tins, and other protections from possible financial crashes, such as avoiding debt at all costs.

3. Organizational change is tough under any circumstances. Change in a family business away from a controlling patriarch is even tougher. Organizational change coupled with expansion beyond core competencies takes tough to new heights. And change accompanied by a fundamental (and philosophical) shift in capital structure tends to make change, for all practical purposes, impossible.

The moral of the story, for the finance guys, was that financial advisors can’t overlook their responsibility to forcefully bind the various parties to the deal. They have an obligation to achieve maximum financial results at all costs, and if that means locking up a belligerent party with onerous contract terms, so be it.

My take away was a bit different. I saw that the optimal deal on paper and the optimal deal in reality differed based on a single factor: the people involved. If I could understand their egos, fears, and philosophies, I could understand the deal.

Put another way, I could assess the likely success of a deal or project by knowing the people involved. The better I knew the people, the more accurately I could predict the viability and risks associated with the deal or project. Getting data about people and their relationships would let me nail down a key part of the risk profile that underpins most NPV analyses.

Many people prefer to see the world through a transactional lens. They will run the numbers and then try to control a belligerent party with power plays, as my classmates would have. I find this approach to be unnecessarily adverserial, onerous, and costly. It ignores transaction costs related to contract enforcement as well as the costs of burned bridges–it’s a remarkably small world, and reputation effects matter. Unless your power is absolute, using it has a tendency to backfire, often in strange ways.

Jason Seiden is Co-founder and CEO of Ajax Social Media, a training company that shows professionals how use social media to work more effectively.