Wednesday, June 1, 2011

Lesson #39: The Art of Negotiation

Posted By: George Deeb - 6/01/2011


& Comment

Strong negotiating skills are often the single most important differientor between closing good deals vs. great deals, or not closing any deal altogether.  That is because negotiation is more of an art, than a science, as it involves creatively "reading" your audience, and knowing when to dig in, and when not to.  In today's post, we will present some high level guidance on how to negotiate your best deal.

First and foremost, for any negotiation to work, both parties need to feel like they are getting a good deal.  It can't be lopsided in one way or another, for the deal to have any reasonable chance for success.  So, structuring deals means working towards a win-win outcome for both parties.  Make sure the other party has clear responsibilities that meet your goals, and vice versa.  You know both parties have done a good job negotiating, when they both feel "good" about the deal, not one party feeling "great" and the other party feeling "lukewarm".

Secondly, most smart parties never lead with their best offer.  They always leave some wiggle room.  So, as an example, when you are buying a property listed for $1MM, it is not uncommon for your first offer to be $900K and the parties agree to somewhere in the middle near $950K.  That 5% discount was already built into the seller's going in psychology, and they were prepared for that move.  But, had you started with a $500K offer for that $1MM listing, the seller could be insulted by such a low offer, and the conversations could end before they even got started.  So, take advantage of building in cushions, in both your asking price when selling, and bid price when buying, so the other party feels like they have negotiated a good deal too, through the process.  But, don't go overboard in your starting positions, or risk a deal never happening.

Thirdly, it is important to know how to use time to your advantage.  Sometimes, to get the best deal, you need to move very quickly.  As an example, putting an expiration date on any offer, before the other party has the luxury of more time, to shop the deal to other potential parties.  In our real estate example above, this could be making an offer that expires before their scheduled broker open house which will open up potentially more interested buyers.  In other scenarios, dragging out a discussion, could work to your advantage.  If you feel the other party is "hot and heavy" to work with you, but is not budging on a key point, there is a good chance they budge, the longer it takes to close the deal, as they will not want to lose the deal to another company in the interim.

Which takes us to the fourth point: in order to get the best terms, the other party needs to feel you have a "hot product" and that they are in competition with other bidders.  If the other party thinks they are the only bidder at the table: (i) they may get nervous about proceeding, and that they may be missing something; and (ii) they have no reason to move on terms, if they think you are desperate, and need them, more than they need you.  As an example, when iExplore negotiated our strategic partnership with National Geographic, in a subtle and non-threatening way, I was sure to let them know I was having similar conversations with multiple other parties, including Discovery Channel, their archenemy they would not want to lose the opportunity.

The last point involves construction of the contract.  Most often, the parties negotiating the deal, are not the same parties executing the deal.  And, you do not want to leave any desired partnership points "up for interpretation" or undocumented, including key deliverable dates.  In that same deal with National Geographic, we cut the deal with their CEO and CFO, but then got handed off to 50 execution people in the trenches: various publishers and editors at three magazines, a cable channel, a website, a retail store and direct mail list.  All fiefdoms trying to grow their own businesses, with no clear incentives to see iExplore succeed.  I just assumed our senior level contacts would be our internal champions company-wide.  And, they were to open up those doors, but it was ultimately up to the execution people to fulfill any obligations.  So, the devil is in the details.

And, worth mentioning, negotiating is also about the intangible things, like watching facial expressions, listening to tonal inflections in their discussions and creative presentation of information that can support your case, to determine where the real pressure points are, and to assess when parties are bluffing, or not.  When, I had to settle old iExplore creditor debts for $0.10 on the dollar after 9/11/01, we would have never been able to accomplish that without a draft bankruptcy filing filled in, and the creditors seeing their name far down the list, behind the senior creditors that would get 100% of any liquidation monies, if the company filed bankruptcy (therefore making $0.10 a better option than zero). 

But, big picture, if you think it is important to make a deal, then get the deal done without trying to carve every last penny out of it.  As an example, I thought the National Geographic strategic partnership discussed above was worth 25% equity to them, but they dug in on 30%.  I wasn't going to quibble over that extra 5% equity stake, at the risk of losing the deal altogether, when their brand association and marketing support had to potential to double our business over night.  But, if you are far apart on important points to you, hold your ground, and don't flinch.

I hope you found these tricks of the trade useful to you in negotiating your next deal. 

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