Negotiation 101
I have negotiated approximately 50 deals in my business career – mergers, acquisitions, exits, license agreements, LLC formations, new market entries and new company launches – in China, Russia, Australia, Brazil, England, Germany, Japan and the US. My first big deal was bringing Ben & Jerry’s and Haagen-Dazs into a shared distribution network after years as arch enemies, and I used the tenets defined below to get the deal done. These ideas can be used in any negotiation, whether buying a car, negotiating a billion-dollar merger, or in your relationships. The basis of his learning is from Getting to Yes, by Roger Fisher, and the work Harvard Negotiation project continued after Fisher’s death.
For simplicity, I’ll use buying a bicycle to illustrate these principles.
- Be clear on your why. Start with being clear on your desired end state. In our example, defining why you want a bike – transportation, exercise, saving money – is important to ensure you get the desired outcome after negotiations are complete.
- Get in the other side’s head. Preparation is important before stepping into any negotiation, ensuring you, or your team, are aligned on the preferred outcome. What many forget is understanding the other party’s interests and points of view is an important key to deal success. Spend time putting yourself in the other side’s shoes and thinking about what will be important to them.
- Know your ‘walk away’. You must have clarity about what factors will cause you to stop negotiating and walk away. Remember, no deal is preferred over a poor deal. Fisher calls this a BATNA (Best Alternative To a Negotiated Agreement). If you don’t buy this bike, what are you left with: taking the bus, buying from someone else, taking your car? In our example, you should establish the highest price you are willing to pay, or risk getting caught up in the heat of the negotiation. If you only plan on spending $150, then understand that, and stick to it – it will help drive creativity in deal making and prevent ‘buyer’s remorse’.
- Start with Interests, before moving to Options. Most undertake negotiations to find something new – a relationship, new ownership, or creating a venture or product that does not yet exist. The tendency is to jump straight to deal terms and options – but the key is to first identify and align on interests and what deal elements are most important. Instead of making an offer, first explore why the seller is selling their bike – if it is not having storage, making money or buying a new one? Once interested are fully identified you can begin to explore possible options.
- Find the win/win. Inexperienced negotiators often default to positional bargaining, starting with positions far apart and coming together to find a solution. The gap between positions is called a bid/ask spread; the ask is $300 and you bid $100, and you settle on $200. This gets to a deal, but one that is typically a win/lose – one party getting the better deal. If you share that your interest is in reliable transportation, and learn that the seller’s main issue is space – then we can explore a possible solution where both sides ‘win’ and feel good.
- Understand Power Dynamics. In any negotiation there are differences in power dynamics. By exploring time, money, and knowledge, you will determine who is in the best position to negotiate. Who has more knowledge of the bike industry, who has more time, who needs the money more? If our seller needs to get rid of their bike quickly, then we have time on our side and can speed to our advantage – offering a lower price, but delivering a quicker transaction. If we are in urgent need of a bike, then the seller has the power and will likely use this to their advantage.
- Third Party Data. Both buyers and sellers need to understand the marketplace. The side that has a better handle on the industry, and has 3rd party data available, can use it to their advantage. In our case, if we know there is a large inventory of bikes available, or we have data on average bike prices, we can use this information as we negotiate. By stating how many bikes are on the market now, or average prices, you define what Fisher calls a ‘standard of legitimacy’ By stating facts, you frame realistic price options, vs negotiating positionally.
- Move to Options. Now that we understand interests, power dynamics and our walk away – we can begin to brainstorm about deal structures that meet both sides’ interests. This is also the time to think big – to try to grow the pie, not slice it up. In our case we may find that the seller doesn’t care much about the money, is under time pressure, and would love to get the bike back when/if they move back to town. If we need a bike soon for transportation, and have a budget – perhaps we can negotiate a win/win where we take the bike for $0 and give it back in a year?
- Move quickly. Time kills deals. In a business setting, I encourage you to document the shared interest quickly, and share document with both sides. Deals can evaporate quickly, so it is imperative to get the key interests and options identified, written down and shared to maintain momentum. and avoid any re-trading (link to re-trade definition) or moving to other alternatives. In our case, have the cash readily available or get to a handshake on the aligned option quickly – before the other side changes their mind.
There is much more to getting a formal business deal done as you negotiate deal structure, rights, equity, exits, organization, etc. – but I have found this process above is an effective and efficient way to move from a first meeting to a term sheet, and deal execution.