To successfully negotiate a business deal you have to
be prepared, observant, professional, and much more. In this article I provide
a number of tips for conducting business negotiations and closing a deal.
1. Listen and understand the other
party’s issues and point of view
Some of the worst negotiators I have
seen are the ones who do all the talking, seeming to want to control the
conversation and expound endlessly on the merits of their position. The
best negotiators tend to be the ones who truly listen to the other side,
understand their key issues and hot buttons, and then formulate an appropriate
response. Try to gain an understanding about what is important to the
other side, what limitations they may have, and where they may have
flexibility. Refrain from talking too much.
2. Be prepared
Being prepared for business
negotiations entails a whole host of things you may need to do, such as:
Get the free Guide to Selling Your Small Business.
Review and understand thoroughly the
business of the other party by reviewing their website, their press releases,
articles written about their company, and so forth. A thorough Google and
LinkedIn search is advisable here.
Review the background of the person
you are negotiating with by reviewing any bio on the company’s site, the
person’s LinkedIn profile, and by doing a Web search
Review what similar deals have been
completed by the other side, and the terms thereof. For public companies,
some of their prior agreements may be filed with the SEC.
Understand the offerings and pricings
from competitors of the party you are negotiating with.
3. Keep business negotiations
professional and courteous
This is also known as the “don’t be an
asshole rule.” Nobody really wants to do business with a difficult or
abusive personality. After all, even after the business negotiations are
concluded, you may want to do business with this person again, or the
transaction may require ongoing involvement with the representative of the
other side. Establishing a good long-term relationship should be one of
the goals in the negotiation. A collaborative, positive tone in business
negotiations is more likely to result in progress to a closing.
4. Understand the deal dynamics
Understanding
the deal dynamics is crucial in any negotiation. So be prepared to determine
the following:
Who has the leverage in the
negotiation? Who wants the deal more?
What timing constraints is the other
side under?
What alternatives does the other side
have?
Is the other side going to be getting
a significant payment from you? If so, the leverage will tend to be on your
side.
5. Always draft the first version of
the agreement
An absolutely fundamental principle of
almost any negotiation is that you (or your lawyers) should prepare the first
draft of the proposed contract. This lets you frame how the deal should be
structured, implement key points that you want that haven’t been discussed, and
gets momentum on your side. The other party will be reluctant to make
extensive changes to your document (unless it is absurdly one sided), and
therefore you will have already won part of the battle by starting off with
your preferred terms. Having said that, you want to avoid starting business
negotiations with an agreement that the other side will never agree
to. Balance is key here.
6. Be prepared to “play poker” and be ready to walk away
You must be able to play poker with
the other side, and be able to walk away if the terms of the deal aren’t up to
your liking. This is easier said than done, but is sometimes critical to get to
an end game. Know before you start what your target price or walkaway price is.
Be prepared with market data to back up why your price is reasonable, and if
you are confronted with an ultimatum that you absolutely can’t live with, be
prepared to walk away.
7. Avoid the bad strategy of
“negotiating by continually conceding”
Years ago, a company I was involved
with was desperate to sell itself. The CEO was convinced that a certain
prospective buyer was the ideal acquirer and he wanted to do the deal with
them. But the buyer kept coming up with new unreasonable demands, and the
CEO kept giving into those demands in the hopes of getting to a closing. So
what did the buyer do? It learned that it could just keep asking for more
unreasonable things, and that the CEO would always eventually cave.
Nine months and $1 million in legal
fees later, the company still didn’t have a deal. I then took over the
negotiations and told the buyer that we were no longer interested in the terms
they had been proposing, and we were walking away unless the price and deal
terms got much better for us. By that time, the buyer itself had expended
a great deal of legal fees and management time to get to a deal, and they panicked
at the prospect of losing the deal. So they conceded to virtually every
point I wanted, including an increased purchase price, and we closed the deal
in 45 days. So the lesson was that continually conceding points (while not
getting anything in return) can lead to the exact opposite of what you are
hoping for. If you are conceding a point, make sure to try and get something in
return.
8. Keep in mind that time is the enemy of many deals
You have to understand that the longer
a deal takes to get completed, the more likely that something will occur to
derail it. (The current COVID-19 pandemic has sidelined many pending deals.) So
be prompt at responding, get your lawyer to turn documents around quickly, and
keep the deal momentum moving. However, that doesn’t mean you should rush
through business negotiations and make concessions that you don’t need to
make. Understand when time is on your side and when time could be your
real enemy.
9. Don’t fixate on the deal in front
of you and ignore alternatives
In many situations you want to have
competitive alternatives. This can enhance your negotiating position and allow
you to make the best decision as to how to proceed. For example, if you are
engaging in a process to sell your company, the best thing you can do is to have
several potential bidders at the table. You want to avoid being locked up into
exclusive negotiations with one bidder until you have reached a meeting of the
minds as to the best price and terms available. Similarly, if you are
looking to buy a product, lease office space, or acquire a loan for your
business, you will often be better off if you have alternatives—and the other
party knows it has viable competitors. By negotiating simultaneously with
two or more parties, you can often obtain better pricing or better contractual
terms.
10. Don’t get hung up on one issue
You want to avoid getting stuck on a
seemingly intractable issue. Sometimes it’s best to suggest that an issue
be set aside for the moment and both parties move on to make progress on other
issues. A creative solution may come to you later outside the heat of the
negotiation.
11. Identify who the real
decision-maker is
You want to understand what kind of
authority the other person that you are negotiating with has. Is he or she
the ultimate decision-maker? I recently went through a long and fruitless set
of business negotiations with a person who kept telling me that he didn’t have
the authority to agree to a number of points we were negotiating. He could tell
me “no” to my requests but didn’t have the ability to tell me “yes.” My
solution (because I had leverage) was that I ended the conversation and said
that for us to make any progress, I needed to negotiate with the person who was
authorized to make decisions and concessions.
12. Never accept the first offer
It’s often a mistake to accept the
first offer from the other side. For example, if you are selling your home and
you receive an offer, consider countering at a higher price or better terms
(even if there are no other offers). If you don’t counter, the other party
will be concerned that they offered too much and may end up with buyer’s
remorse and attempt to get out of the deal. And buyers expect that there will
be a counter as they expect that their first offer will likely be rejected. Most
buyers will leave room in their first offer to go up by at least 5%-15% in
price, depending on the situation. Counter-offers and some back-and-forth
negotiation will most likely lead to the two parties being satisfied that they
struck the best deal they could, and thus be more committed to closing the
deal.
13. Ask the right questions
Don’t
be afraid to ask the other party many questions. The answers can be informative
for the business negotiations. Depending on the type of deal, you could ask:
Is this the best pricing or offer you
can give me?
What assurances do I get that your
product or solution will actually work for me?
Who are your competitors? How do their
products compare?
What else can you throw into the deal
without cost to us? (A particularly useful question to ask car dealers.)
What is your desired timing for the
deal?
How does our deal benefit you?
We want to avoid unreasonable forms of
contracts or unreasonable lawyers on your end. How do we ensure that?
14. Prepare a Letter of Intent or Term
Sheet to reflect your deal
It is often helpful, at the
appropriate time, to prepare a Letter of Intent or Term Sheet to reflect your
view of the key terms of a deal. This can help expedite getting to an
agreement, save on legal costs, and continue the momentum for a deal. It
is more informal than a definitive agreement and easier to reach an agreement
on. For example, Letters of Intent are often prepared and agreed to in connection
with mergers and acquisitions (see How to Negotiate a Business Acquisition Letter of
Intent). And here are some good sample forms to review that can
help you draft such a document:
A letter of intent for a joint venture
A term sheet for leasing office space
A term sheet for investment by a strategic investor
A term sheet for selling the company, favorable to the
seller
An acquisition letter of intent, favorable to the
buyer
15. Get the help of the best advisors
and lawyers
If it’s a big or complicated deal, you
want real expertise on your side helping you in the negotiations and drafting of the contract. For example, if you are selling your company, it is usually
worth the money to hire an investment banker who knows your industry and has
relationships with prospective buyers. If you are doing a real estate deal,
you want an experienced real estate attorney who has done many deals like the
one you are working on (and not a general practitioner lawyer). If you are
doing an M&A transaction, you want a lawyer that has done 50 or 100 M&A
deals (and not a general business lawyer). These advisors don’t come
cheap but are worth it if you get the right one.
Source:allbusiness.com