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Session 5: Develop negotiating skills

OBJECTIVE: In this session we cover the important impact of good negotiating skills in growing your business. We will also explore ways to build up skill in negotiating.

      Develop negotiating skills

Good negotiating skills will help you grow

Growing your business includes ongoing daily encounters where you are either buying or selling. The outcome of these transactions can play a major role in your future. To a large measure then, the degree of your success can depend on your skills as a negotiator. This session will explain techniques you can employ in all transactions as you grow the business and ultimately when you sell the business.

Reasons for failed negotiations

There are two ways to expand your business: either increase your earnings or pay less for what you buy. To be successful in paying less requires negotiating skills. But for some entrepreneurs negotiating is not a pleasant experience. Some lack the confidence to ask "what special price are you offering today?" You can quickly overcome this by starting the practice of asking this question every time you buy something. Some guidelines to keep in mind:

  • Negotiating is collaboration between you and the other side to satisfy both sides of a transaction and a win/win result.
  • It is a standard and healthy business practice.
  • It is not based on greed but from a healthy business attitude to thrive.
  • As you practice it you will get better at it.
  • As Wayne Gretzky has said: "You miss 100% of the shots you don't take."

Overconfidence
On the other hand, overconfidence can upset a potentially profitable transaction for both parties. Here's an example: A shopping center landlord was negotiating with 7-Eleven Stores to renew a lease and 7-Eleven was asking for a reduction in rent due to disappointing sales. As a credit tenant, the 7-Eleven occupancy was valuable to the landlord.

But through overconfidence he turned down the offer and rented the space to an independent store which resulted in many headaches. He had overlooked a non-negotiable 7-Eleven deal point: they could only pay rent that was justified by past sales. The landlord should have negotiated a lower rent with provisions for rent increases as sales improved.

John Powers Attorney-at-Law John Powers
Attorney-at-Law
Play Video
Can negotiating skills be acquired?
Not recognizing the other side's viewpoint
The 7-Eleven lease is also an example of one side (the landlord) not fully considering the other side's viewpoint and limitation. The lesson is to listen more than talk. Ask questions to expose attitudes and flexibility of thinking. Here the purpose of negotiating is to discover the parameters of the other side. Then after getting their story, persuade them to listen to your side of the situation. In this process you will need to put yourself in the other side's shoes to evaluate both the most and the least they will be willing to sell and frame your proposal with that in mind.

Viewing it as a win/lose situation
"Win or lose" means that one side is going to lose. But approaching a negotiation as a contest is not the way to accomplish a transaction that could be good for both sides. Instead you should look at the negotiation as collaboration where you start by figuring out what they want and how much of what they want you can give them. The more you are able to give them what they want, the more they are likely to give you what you want. The resulting goal will be a compromise where each party gives up a little to gain a little.

What is acceptable to the other side?

Determine market comparables
Before starting a negotiation the buyer should determine what the actual closing prices were in recent comparable transactions. For example in real estate the use of "comps" plays an important role in establishing benchmarks for how much is paid for houses. In an important transaction such as selling your business (covered in another section of this course) a professional appraiser could also be used to establish the price along with other evaluation methods.

While "comps" establish overall pricing guidelines, sellers must then justify any additional benefits inherent in their product to justify a price above prices paid in other recent "comps". Here are some other factors to consider in a purchase transaction. This is from session 9 in Starting My Own Business:

Building pricing power into products Pricing power
As an operating entrepreneur, one of your primary goals should be to build pricing power into your product or service. Pricing power is also a powerful tool in a negotiation. It can remove a product from competition. For example a toll road with no competitors has ultimate powerful pricing power because there are no alternatives to chose from. Coke© has built their pricing power and consumer preference through saturation advertising, marketing and consistent quality over the decades. Your goal will be to build pricing power into whatever you are selling to help distance yourself from competition and justify your negotiating position.

In a buying transaction you must consider the other side's pricing power to establish how much you are willing to pay. For example, you may agree to pay $1.00 for a Hershey bar when competitor "Joe's" chocolate bar is $.70, but you may not want to pay $2.00 for the Hershey against Joe's $.80 bar.

A commodity on the other hand has no pricing power. The price is established by the market. In order to succeed in a negotiation involving a commodity you will need to have the lowest cost in order to achieve any degree of pricing power. Examples of commodity businesses include agricultural commodities and airlines (even as airlines try to differentiate themselves to justify higher prices).

Determine the deal points Determine the deal points for both sides
Both parties to a negotiation will have some issues that are "deal points." A deal point is a non-negotiable condition and a transaction cannot be closed without including it. Most all transactions will have deal points and you need to determine what they will be on both sides of the negotiation. Here are some deal points between a landlord and a tenant:

The landlord's deal points:

  1. A cost-of-living adjustment to reflect inflation.
  2. A net net net (triple net) lease where the tenants pay their share of taxes and other common area costs.
The tenant's deal points:
  1. A right to sub-lease the premises.
  2. A kick-out clause in event the anchor tenants vacate the center.

What special benefits will the other side derive?
The other side may be highly motivated to make a deal because of a special benefit to be gained from what you are selling. You need to determine if this is so. For example your product may have special features which can be leveraged up to satisfy a huge market. Or you may possess a special real estate location, or a patent, or a market share which the buyer is willing to pay a premium for, above what might otherwise be considered the going market rate.

What is their reason to buy or sell?
It is useful to know if there are underlying reasons why a business is for sale. Is the seller in need of cash to make payroll? Does the buyer of your patented widget have ability and desire to scale it up? Does the seller of a business have pressing family problems?

Comparison of "My Leverage" and "Their Leverage"

Here is a simple tool you can use to help establish your negotiating stance on any buying or selling transaction. Open a new word document and create two columns. Title the left column "my leverage" and the right column "their leverage". Leverage means advantages and pricing power issues each side is bringing to the table. Under these heading begin listing each side's leverages including vulnerabilities, pricing power and any other relevant factors. This analysis can furnish a better overall understanding of the transaction. Here is an example where we are considering a shopping center location for a franchised chain of pizza stores:

The pizza operator's leverage The landlord's leverage
  • Traffic count slightly below required
  • We offer a bankable lease
  • It's not the last good location in town
  • The location is also desirable for other fast food chains
  • An independent shop will pay more rent
  • Our location has an anchor grocery store which will attract more shoppers

What may emerge is a clarification of the reasons you need to be more or less flexible in meeting the other side's positioning. Or you may begin to see that the risks will outweigh the merits of the deal.

Negotiating rules

Stan Henslee CPA Stan Henslee
CPA
Play Video
Can negotiating skills be learned?
Know what you want and how much you will pay
Have a clear written specification in place to describe the product or service you are buying and the required terms of purchase. Terms would include delivery date required, payment terms and discounts, warranties, cancellation provisions, etc.

How much you pay can also be determined by evaluating the economic return your investment will produce. For example you may establish a minimum annual return on investment of say 20% and any purchase price must achieve that goal.

Willingness to pay will include factors such as how much the other side needs your product and what degree of pricing power does your product (or their product) possess? Do you have a pricing edge for any of these reasons?

If you are leasing or buying real estate locations for your retail chain, you should create a site model criteria format for evaluating sites. This will be your tool to objectively rank each potential location based on appropriate factors such as traffic count, etc. See session 10, Location and Leasing in the Starting My Own Business course to create your own site model.

When buying, require an asking price
Vendors selling flowers and oranges at busy intersections make a mistake by not displaying their prices...so potential customer drive on. Whenever you are the buyer, the seller should be required to specify his asking price and terms. If there is no price there is nothing to consider. With an asking price in hand you are in a position to evaluate whether the transaction has enough potential to be pursued.

Don't make an offer without contingencies
It would be a mistake to rely on any contingency provisions without the advice of your attorney. However, following is a general discussion on how a contingency strategy can become part of a negotiating event. The purpose of including a contingency provision in an offer is to give you an escape in the event that subsequent information would cause you to change your mind and wish to withdraw the offer.

Negotiating lease agreements Your offer would be made subject to the contingencies you specify in your offer. In some instances it may be worth it to the party making the offer to include a provision that in the event of cancellation based on a contingency, a "break up fee" be paid. Here are some "subject to" examples:

  1. Buyer's approval of licensing and permits
  2. Buyer's approval of financing
  3. Buyers approval of conditions covenants and restrictions
  4. Approval of buyer's board of directors or advisory board
  5. Approval of buyer's attorney
  6. Subject to seller's acceptance of offer within a specified time and date

Keep in mind that contingency number 6 above (subject to acceptance within a specified time) does not provide an "out" in the event the other side accepts the offer within the time specified.

Be willing to walk
A framed motto is in the office of most every good real estate developer states:

THERE IS NO SUCH THING AS THE LAST GOOD LOCATION

BATNA Best alternative to a negotiated agreement BATNA
"BATNA" means "Best alternative to a negotiated agreement". It is a term coined by Roger Fisher and William Ury in their book, "Getting To Yes: Negotiating Without Giving In". It is a standard to protect you from accepting terms too unfavorable and from rejecting terms that would be in your best interest. In simple terms, to determine your BATNA you:

  • Make a list of potential alternative approaches to negotiation
  • Convert the more promising ideas into practical actions
  • Select the best option
  • BATNA will also tell you when to accept and when to reject an agreement. You first decide what your best alternative would be and if the proposal is better than that you accept it and if the proposal is worse you reject it.

    Part of BATNA strategy is to also determine the BATNA of the party with whom you are negotiating. You can follow the same approach used in determining you own BATNA. Having defined both your own BATNA and that of the other side will help determine the strength of your own position. Once you weigh your comparable positions, you would only reveal your own BATNA if it's better since revealing a weak BATNA will weaken your position....and revealing a strong BATNA will strengthen your position.

Top Ten Do's and Don'ts

THE TOP TEN DO'S
  1. Practice and study to develop negotiating skills.
  2. Fully consider the other side's viewpoint and limitation.
  3. Evaluate your leverage with that of other side.
  4. Build pricing power into your product or service.
  5. Determine the "deal points" for both sides.
  6. Compare "your leverage" and "their leverage".
  7. Evaluate the economics to determine how much to pay.
  8. Spell out the detailed terms of a purchase.
  9. Ask the other side to make the first offer.
  10. Include an expiration date in your offers.
THE TOP TEN DON'TS
  1. View negotiating as a win-lose transaction.
  2. Lack confidence to ask for a special deal.
  3. Be over confident in a potentially profitable negotiation.
  4. Overlook the power of effective negotiation skills.
  5. Ignore the other side's reason to buy or sell.
  6. Refuse to be flexible to meet the other side's positioning.
  7. Consider buying without first having a seller's asking price.
  8. Make an offer without including an escape clause or clauses.
  9. Be blinded by emotional enthusiasm.
  10. Be afraid to walk away.

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