Effective Contract Negotiation for Business People
Whether you’re a C-suite business professional, a stay-at-home mom, an all-star athlete, or even a self-employed clown that performs at children’s birthday parties on the weekends, chances are you’re going to have to negotiate at some point in your life.
It could be anything from a multi-million dollar merger to the terms of your current cable plan. But no matter what’s at stake, the better you are at negotiation, the more likely you are to get both what you want and what you deserve.
But there’s more to negotiation than just coming out ahead. In fact, the most successful negotiations are often the ones that leave both parties happy and satisfied with the outcome. After all, many long-standing business partnerships are built on the backs of mutually beneficial agreements. It’s unlikely you’ll be working with them in the long-term, no matter how far ahead you came out, if your negotiations are excessively brutal.
The key, it seems, is all about balance. You can’t be afraid to shoot for what you want but you certainly don’t want to drive away the party you’re negotiating with. That is where the art of negotiation comes in – learning how to walk that fine line between asking for too much and being taken advantage of.
In this eBook, we’ll be looking at how to achieve this balance while walking you through the three phases of successful contract negotiation: Preparation, Negotiation, and Execution.
Each step is absolutely critical to a successful negotiation process and, as such, should not be skipped under any circumstances. Even the most highly skilled negotiator needs to go through each of these phases to get the most out of any deal.
We’ll also be taking a look at some of the Dos and Don’ts of contract negotiation along the way as well as tips and tricks that will help ensure you walk away with everything you’re shooting for.
So, no matter what you’re negotiating or the severity of the stakes involved, this eBook will serve as your guide through this delicate and crucial process.
Let’s get negotiating!
Phase 1: Preparation
Just like nearly any endeavor in life, preparation is one of the most important indicators of achievement. The renowned ancient Chinese philosopher Confucius perhaps put it best, “Success depends upon previous preparation, and without such preparation there is sure to be failure.”
Negotiation is no different. Walking into a negotiation without having done your due diligence is a bit like going into a dodgeball match wearing a blindfold: you won’t know what you’re aiming for, you’re likely to get hit where it hurts most and from every angle, and you’re probably going to end up bruised and battered by the end of it all.
The question is, then, how do you prepare for a negotiation to ensure you come out successful? There a few things to consider here.
Position vs. Interest
First off, one of the most important steps is first thinking about what you hope to achieve from these negotiations by considering your own position and interests. While these two terms might sound similar, there’s actually quite a difference between them.
A position is the specific ask of a single party. The interest, on the other hand, is the underlying goal behind these specific asks.
Your position in talks with the current landowner would be to buy the plot for a set amount if you would like to acquire a plot of land so that at some point you can develop an apartment complex on it,. The interest would be the future development of valuable real estate.
Defining your positions and interests for every aspect of the negotiation is absolutely critical to creating an effective negotiation strategy. Depending on the type of negotiation, keeping your overall interests hidden might be necessary in order to ensure you receive the outcome you’re looking for.
The landowner may up his asking price accordingly if he discovers you intend to build a piece of real-estate that’s going to be highly valued.
In that same vein, it’s also important to try and determine the position and interests of the party you’re negotiating with before walking into the room as well. Anticipating their actual offer (position) beforehand can help you develop counterpoints that you can use for a better outcome.
What’s more, if you are able to discover their underlying interests, you can also better gauge how far they are willing to stretch their immediate terms. You’ll have even more leverage in the negotiation if they have a higher stake in the game than they are letting on.
While it’s true that negotiations can be about uncovering weakness as above, that certainly isn’t the only way to come to an agreement. Sometimes, as mentioned earlier, the best terms are those that leave both parties happy rather than one limping away.
Determining the other party’s interests comes into play in this type of negotiation as well. The other party may propose certain terms that you may find to be wholly unrealistic and non-negotiable. Rather than responding with a simple “no” though, if you understand their interests you can instead suggest terms they haven’t considered that you still find to be favorable.
In the words of Jerry Maguire, think of it as “help me… help you. Help me, help you.”
The next step in the crucial phase of preparation is to do your research. The more informed you are before walking into talks, the better able you’ll be to respond quickly and accurately with the information you need to drive negotiations in your favor.
What is the market rate for a piece of land that size? How has the franchise you’re interested in purchasing been faring the past several years? What kind of initial investment have most people had to make and does it match up with what the other party is immediately offering? What hidden costs are there that the other party isn’t disclosing?
As you find out more and more about the subject, be sure to note specific points that you can leverage in your favor. Take a look at some of their more recent trends if a franchise representative claims they’ve been an industry leader for the past decade. Has more competition sprung up in the past several years that would hurt the ROI of such an investment? Has there been a recent influx of negative PR?
What’s more, spend extra time trying to figure out what’s at stake for the other party. Is this a time-sensitive deal that they need to close in a hurry? Do they have to walk away with a certain price in order to stay viable? These are all factors that you can use to your advantage when it comes to figuring out proper terms.
In that same vein, be sure to research yourself. This tip often goes overlooked and can end up leading to some pretty quick and unsuccessful negotiations. Try to put yourself in the place of the other party. What information can they find out about what’s at stake for you? Can they find out how much you’re willing to spend, what terms you’re willing to agree to, and how far you’re willing to go?
If so, you may want to prepare yourself for some rough (and uncompromising) terms, alter your strategy, or find another party to negotiate with.
Establish a BATNA
In addition to putting in the time and resources to research the other party (and yourself), you’ll also want to establish a best alternative to a negotiated agreement, otherwise known as a BATNA. As the name suggests, a BATNA is essentially the best course of action you could still follow through with in case this particular negotiation fails.
You can use that offer as your BATNA when negotiating a sale with an interested party if you’re selling a car and you already have a guaranteed offer from a dealership for $13,000.
In general, a skilled negotiator always has his eye on the BATNA and won’t ever make a deal for an offer lower than the BATNA. However, there are a number of things to consider besides just the qualitative aspects of the deal like the overall price.
The dealership may be offering you $13,000 with a local party offering $12,500 but what if the dealership is several states away? What is the value of the time and energy required to drive the vehicle out there and secure a ride back? Or what if the offer with the dealership is contingent upon using a portion of that money to buy a new car from them? Does it still come out better than being $500 cheaper?
This is one of the most important parts of determining your BATNA – accounting for all the complex and qualitative factors at play.
Things get even more tricky with larger-scale negotiations such as buying a franchise or selling a business. What kinds of assets are on the table that one buyer is offering and the other isn’t? How much value do you place in those assets?
Are you still allowed to be on the board of directors after selling? Do you still retain a share of the profits? Or how much territory is your franchiser offering compared to their competitors? What kinds of startup expenses are they willing to foot the bill for and how is their training program?
These are all incredibly important questions to consider and, if at all possible, to try and attach a quantitative value to. Doing so will help you tone down the complexity and compare values much more quickly.
Before heading into the actual negotiations, it may be helpful to go through a checklist of what you need to know, what you need to come prepared with, and what you’re end goal is for these talks.
That’s why we’ve included this pre-negotiations checklist to help organize your thoughts and get you on the right track for walking out ahead.
While this checklist is a great way to prepare you for nearly any meeting, it’s worth remembering that each negotiation is different and as such, will require its own specific documents. Maybe, talks about a franchise will require proof of assets and other legal documentation while a negotiation about the price of a lawn care service for your business will not.
This checklist is best used then to help you build an effective strategy, not tell you everything you need for talks to go smoothly. Be sure to use it accordingly.
The Pre-Negotiation Checklist
- Determine whether you actually can negotiate (a simple step but you’d be surprised at how many talks are entered into without realizing the other party is unwilling to negotiate at all).
- Designate what your goals are for the negotiations as well as the specifics you’re going to ask for – your interests and your position.
- Identify the interests and positions of the other party. Think about whether they align with your own interests, if your positions align with their interests, and if there’s an alternative position you can take that might meet their interests while still benefitting you.
- Think about what’s at stake, both for you and for the other party and change your strategy accordingly.
- Decide beforehand on a threshold – the absolute limits of what you are willing to accept.
- Think about the other party’s threshold and what you think they’re willing to accept.
- List out what you’re willing to trade off in order to get you closer to meeting your overall interests. What do you think they’re willing to trade off?
- What is your best-case scenario with this negotiation? What is the worst? What are their best- and worst-case scenarios?
- What is your BATNA? What is their BATNA?
- Agree upon a neutral setting – depending on the skill and experience of the parties involved, it may be beneficial to hold negotiations on territory not associated with either party. For individuals who don’t do this every day, debating on someone else’s turf may be more troublesome.
You’re well on your way to negotiating a solid and successful deal if you’ve crossed off each and every one of these steps.
Phase 2: The Negotiation
The next phase is where the magic happens – this is where all of your hard work finally pays off and you utilize all of the knowledge you collected during the preparation phase to leverage better terms and an overall more successful deal.
But as you probably know, negotiation isn’t just about regurgitating information. Instead, there are a number of additional strategies and principles you can adopt to help boost the odds of a beneficial negotiation. Similarly, there are quite a few ways you can jeopardize the success of a negotiation as well.
The following chapters take you through some of the most valuable things to keep in mind when negotiating as well as a few of the more important dos and don’ts when it comes to successful bargaining.
Hard Negotiation vs. Soft Negotiation
When many people think of negotiations, they tend to envision two people desperately and ruthlessly trying to scrape up as much as possible from a deal while continually trying to undercut the other party. These people are only concerned about what they can get out of a negotiation and have no concern whatsoever about the other party involved.
They are cold hard businessmen that are there to make a profit, principles be damned!
While this might be taking it to extremes just a bit, this type of negotiation is generally referred to as “hard negotiation.” Also known as distributive, competitive adversarial, and win/lose negotiation, this type of mindset is focused on two fighters entering the ring and only one leaving alive. It’s fixated primarily on trying to get the biggest piece of the pie. If the other party is hurt in the process, well, so be it.
But despite what some people may believe, there’s actually another type of negotiator out there too: the soft negotiator. Focusing on a win/win approach to negotiation, this type of dealmaker is all about collaboration, compromise, and finding a way for both parties to get what they want in the end. This type of negotiation is also called integrative, friendly, or collaborative.
While these types are actually two ends of a spectrum with most negotiators falling somewhere in between, there are a number of benefits and detriments to each of these specific negotiation profiles.
- Stands to come out ahead with greater benefits
- May be able to overcome odds that are against them through hard bargaining, insults, stubbornness, and other off-putting tactics
- Can end up permanently jeopardizing the relationship with the other party
- The approach could backfire entirely and leave the hard negotiator with nothing at all
- Usually results in getting at least some degree of the overall goal
- Is more likely to secure a long-term working relationship
- May stand to gain less from the negotiations due to compromising
- May be taken advantage of and bullied into a deal by a hard negotiator
What’s more, individual situations, the stakes involved, and the relationship of the two parties all play a part into what type of negotiation is likely to result as well.
You’ll likely form your own unique negotiation profile over time but the takeaway here is that all negotiation doesn’t have to be driven by hard bargaining tactics and uncompromising ruthlessness.
5 Tips for a Successful Negotiation
Whether you employ hard negotiation tactics or soft ones, there are a few standard tips that you can follow to ensure your negotiations are successful in the end.
- Be Willing to Walk Away – This is considered by many of the most successful negotiators to be the key to a good deal. You’ve got a problem if you aren’t willing to cut a deal because the bottom line terms aren’t to your liking.
This is where your BATNA comes into play. Having outside options is more than just a leveraging point. It’s also the best safeguard against you settling for a bad deal that you’ll only end up regretting later.
- Maintain Objectivity – A dispassionate negotiator is an effective negotiator. Be sure to check your emotions and pride at the door – both may end up compromising your upper hand during talks.
Despite what many people imagine when they think of negotiations, losing your head during these debates will show that you have more at stake than you’re letting on or could end up scaring the other party off. Either way, you’ll likely to leave without agreeing on the terms you were hoping for.
- Support Your Position with Facts – A debate isn’t about shouting the other party into submission. Instead, it’s about convincing the other party that your side is right. And the more facts you have on your side, the easier it will be to win over the other party.
Beyond that, the more informed you are about the situation, the better you’ll be at pointing out inconsistencies, establishing reliability, and controlling the flow of the conversation as a whole.
- Take the Time to Really Listen to The Other Party – A surprising number of negotiators today try to dominate the conversation by talking endlessly, as if the other party is going to concede to your terms based on sheer exhaustion alone. Not only is doing so unlikely to bring about the results you’re aiming for, it could also be holding you back from gleaning some very beneficial insights as well.
You’ll be able to more accurately determine their overall interests, what they’re willing to give up, and ultimately how much you stand to gain, if you take the time to actually listen to the other party.
- Make the Ask – Don’t be afraid to actually ask for the terms you want outright. Business negotiations are no time to be coy. You’re showing that you value your time and that of the other party as well if you cut to the chase rather than dancing around the issue.
What’s more, being direct and forthcoming with your position can also help reduce confusion, saving you a lot of time and hassle down the road.
5 Mistakes to Avoid
In the same vein as the tips offered above, there are also a number of pitfalls to avoid when in high-stakes negotiations as well. Below are some of the most important ones to watch out for.
- Being in A Rush – Time is money to be sure but the half an hour saved by hurrying through talks is rarely worth the headaches and long-term consequences that come out of a poorly constructed deal.
Give your talks the time and attention they deserve. Schedule enough time for breaks throughout the meeting as well as meals if the negotiations are expected to run long enough. While the idea of being in talks for a full day may sound incredibly unappealing for most people, the terms you come to when time is on your side are likely to be much better than when you’re scrambling to get to another meeting.
- Only Considering Your Own Position – Just as you’ll be more likely to give in to terms that appeal to your best interests, the other party is only going to agree on positions that cater to theirs. You’re likely to end up with a stalemate rather quickly if you both refuse to look at the issue from the other side’s perspective.
It’s crucial then that you try to see things from the other party’s eyes. What are their goals for these talks? What are their overarching interests? Once you figure out their stake in the game, you can begin crafting deals that work well for both of you.
- Granting a Favor Without Any Return – While soft negotiation can be the best way to come up with terms that meet both parties’ needs, there is such a thing as being too soft. Giving away free favors is one of the biggest mistakes of a soft negotiator.
Make an effort to win over the other party but never at the expense of their respect or the probability of achieving your goals.
- Making Assumptions – Walking into a negotiation with loaded assumptions is one of the biggest hindrances to a well-prepared strategy. It can unravel your entire argument, put you on the defensive, and result in a significantly compromised position of power, if these assumptions end up being false.
Enough can’t be said about the merit of double checking everything, from the precise terms of a contract down to the interests of the other party. When it comes to business, you’re better safe than sorry.
- Failing to Document Everything – Lastly, be sure to take obsessively detailed notes. Failing to do so means you’ll have to rely solely on memory and the word of the other party and, as you probably know, both of these are rarely worth trusting.
Phase 3: The Execution
While the talks may be over, there’s still a fair amount of work to be done.
Once you and the other party have finally come to mutually beneficial terms, there are a number of steps you should take in order to ensure smooth sailing from here on out.
First, make sure to insist on being the party responsible for drafting the final agreement. This may require the help of a lawyer or other legal professional but the cost is well worth it. By taking control in this fundamental step of the negotiation process, you can ensure that all of the points you discussed are actually included in the contract.
What’s more, you can also include points that were not discussed (either due to lack of time or simply oversight) into the draft as well. The other party will likely be reluctant to make large-scale changes to the document and, thus, give you the upper hand. Be sure to tread lightly though since incorporating too many new points might force you right back into negotiations.
You’ll also want to agree on the next steps of your agreement and incorporate them directly into the contract. It typically isn’t binding if it isn’t in writing. When time is a major factor (as it so often is in most business dealings) you’ll want to be sure the other party lives up to their word in terms of getting started.
Last but not least, be sure to thank the other party for their time. You’ll want to solidify this negotiation experience as a pleasant and mutually beneficial one if this is going to be a continuing business relationship. A simple thank you at the end of talks can end up going a long way towards establishing a profitable partnership in the long run.
As you can see, there’s a lot more to effective contract negotiation than simply overpowering the opposition with a dominating and stubborn personality like most people imagine. In fact, there’s an enormous amount of research, planning, strategy, tact, and restraint involved in getting the best out of any deal, both inside and outside of the business world.
I hope that the tips and techniques covered in this eBook have helped you better understand the intricacies of this vital part nearly every industry. Beyond that, I also hope you see that negotiation doesn’t have to be a win/lose situation – that often the most fruitful talks are ones that end up with both parties feeling like they’ve won in the end.
Ultimately, I hope that the information provided here has helped foster in you the skills you need to negotiate effectively, successfully, and confidently.