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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.
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:
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.
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
Determine market comparables
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:
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 for both sides
The landlord's deal points:
What special benefits will the other side derive?
What is their reason to buy or sell?
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:
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.
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
Don't make an offer without contingencies
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:
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
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.
Deciding on a business | The business plan | Home based businesses | Financing the business | Business organization | Licenses and permits | Business insurance | Communication tools | Buying a business or franchise | Location and leasing | Accounting and cash flow | E-Commerce | Opening and marketing | Managing employees | Expanding and handling problems
Getting financial controls in place | Getting your team in place | Customer feedback | Achieving lowest expenses | Develop negotiating skills | Alternatives for capital allocation | E-commerce | Growth by duplication | Vertical integration | Franchising your business | Global expansion | Buying businesses | Public ownership | Selling your business | Considerations for family succession
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