Revised and updated Aug. 16, 2020
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 successfully 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 entails a whole host of things you may need to do, such as:
- 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 the 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 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 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 the 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 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 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 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 in to 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 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:
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 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.
Copyright © by Richard D. Harroch. All Rights Reserved. Many thanks to Richard Smith, an M&A partner at Orrick, Herrington & Sutfcliffe, for his helpful input into this article.