Is it better to sell your home for $500,000 than $400,000? Not necessarily. The higher-priced offer may have contingencies, such as selling the buyer’s current home. The lowest price may not be the best buy if it doesn’t include exit provisions.
When negotiating a deal agreement, terms, words, and implications are often as or more important than numbers. Here are five review guidelines:
1. Envision the strategic value
IBM contracted college students to develop DOS (disk operating system) for IBM-PC. The company bargained hard and paid them modestly. The students inserted a clause enabling them to sell the operating software to anyone. Those students were Bill Gates, Paul Allen, and friends.
IBM dictated the price but overlooked what could happen. The strategically-thinking students envisioned the potential value.
Bargaining can get tricky when both sides foresee the strategic value. In such cases, the ability to negotiate skillfully becomes of utmost importance.
2. Assess feasibility, trade creatively
Negotiating a single item (usually price) is haggling. If you are the buyer and the seller drops the price, you are moving in the right direction. Haggling leaves little room for creativity, but it does provide clarity.
How do you measure success when modifying language and trading words, not just numbers?
Often employers seek non-compete clauses in their offers to crucial executives or talent. This results in hard bargaining. But is it worth it if you will rarely enforce the non-compete clause? Instead of fighting over difficult or costly terms to enforce, trade creatively to achieve your goals. For example, include provisions that:
- Vest benefits after a certain service period or
- Require repayment of signing or other bonuses for early departure (“sanctions”).
3. Balance precision and simplicity
Startups often have simple one or two pages B2B contracts. Compare that with a healthcare facility’s agreement for a medical procedure. Why is one deal a virtual handshake while the other has extensive legal terms and conditions?
A B2B startup needs simplicity when business relationships begin. It is still determining how things will evolve. On the other hand, medical contracts must cover numerous issues, such as the scope of service and liability limits. Therefore, the healthcare provider dictates the language governing these issues with little latitude for the consumers.
Most transactions specify deliverables and remedies for default while leaving some terms open-ended. However, the early simplicity tends to disappear in successive contract renewals. After a while, it may be time to construct a new, more straightforward agreement that satisfies all sides.
4. Evaluate risk critically
Lawyers insist on warranties, indemnification clauses, and liability limitations to protect their clients. Blaming them for unintelligible contracts is unfair. However, they inadvertently overlook some excellent deals when focusing on every possible risk. The negotiators must therefore keep sight of the big picture.
A private construction firm’s lender insisted the two owners be personally liable for up to $50 million. After an extensive dialog, the owners offered a $20 million personal guarantee but wouldn’t go higher. The lender stood firm at $50 million. The whole deal risked crashing.
The executive consultant to the owners asked them, “are you worth $20 million?” Nowhere near it came the reply. “Fine,” said the advisor. “If you are going to go bankrupt, you might as well agree to $50 million.”
Once you’ve agreed on broader issues, avoid quibbling over moot details. After the owners conceded on personal recourse, the extent of their potential liability didn’t matter much.
5. Negotiate the relationship
Both sides must see the problem or issue in the same way to solve it. You know your “Intents” and “Walk-Aways.” The other side may not. Sharing information to structure the other side’s expectations builds trust and strengthens relationships.
A negotiation affects a relationship in two ways:
- It defines future rights and responsibilities.
- It is a trial for a long-term relationship. The parties get a glimpse of how well they will collaborate in the future.
Negotiating terms and conditions is a mutual learning exercise. Negotiating parties uncover potential problems before wasting resources.
I conduct negotiation skills training workshops to help you make negotiation skills your corporate capability. I would love to hear about your experiences! Please share your stories here.
Satish Mehta
Author, Speaker, Coach
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