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Whether negotiating agreements with sellers, investors or landlords, the art of negotiation is an essential skill to learn for any businessupdates.org or startup founder. Let’s take a look at how to negotiate deals, why negotiation is essential and how you can make the most of your leverage to get the fairest deal possible.
For any newly formed business, there are four main categories of agreements that you can negotiate:
- Customer and supplier contracts
- Investment financing agreements
- M&A contracts
- “Partnership” type agreements (commonly considered referral agreements, distribution agreements, vendor agreements, etc.)
We cover all of these topics, but when we say “commercial agreement” in this article, we mean customer and supplier agreements.
Every business needs customers and suppliers, but why is it important to have a written contract?
Written contracts ensure that the rights and obligations of all parties are clear. This makes fights less likely. They also ensure that you protect your intellectual property (IP) by making it clear who owns an IP created in the future or already existing. There are also confidentiality clauses in contracts that protect your trade secrets.
Written contracts also help to mitigate risk. For example, you can include indemnifications that require the other party to pay your costs if you are sued for something the other party did or did not do.
Related: Negotiation Basics: 8 Common Questions And Answers
Negotiating 101: The Basics
Why is it important to negotiate a commercial agreement? Negotiating a commercial agreement not only protects your interests and those of your company, but negotiation is an important tool that helps define each party’s obligations and address what will happen if one or more parties fail to meet them . Without these clarifications, costly disruptions can occur, potentially leading to lengthy litigation.
Protect your interests
It is of the utmost importance that you represent your interests. When collaborating, each party has different objectives and interests in the deal. A seller will be focused on receiving payment and will not want any late payments or additional obligations. A buyer will focus on what will be received and want to guarantee to maximize the value of what is received. A buyer also wants protection if the seller fails to deliver what is expected based on the buyer’s quality, quantity, timing, or other objectives.
It is essential to define each party’s obligations and address what will happen if one or more parties fail to meet them. Without these clarifications, costly disruptions can occur, leading to lengthy dispute resolution.
Related: How to (Finally) Get Buyers and Sellers on the Same Page
Each party to a contract will want to transfer risks and responsibilities to the other party as much as possible. This limits their own obligations and gives them more leverage over the other party to secure their interests.
Negotiating an agreement provided by another party is an important way to balance transaction risks; it helps make them more manageable and the contract more valuable to the party receiving the contract.
Related: Entrepreneurs aren’t risk seekers — they’re just better at risk
Make sure important contract information is included
Each party to a commercial agreement values different elements of that agreement. During negotiations, promises are often made that a party will rely on as crucial to closing the deal. They may include timing, pricing incentives, delivery details, ownership of intellectual property, support services or performance promises. These promises or additional details may not be included in the contract and will eventually be presented for signature. Without negotiation to ensure that these promises or details are included in the contract, the company that depends on them may not receive them.
Honesty is key
If only one party’s objectives or interests are met, an unbalanced relationship often arises. Significant imbalances are not conducive to stable or lasting business relationships or cooperation during the term of an agreement.
It is also critical to reduce confusion and potential conflict. When both parties to a contract provide input on the parts of the agreement they value, it reduces the likelihood of misunderstandings that would harm the parties’ business relationship.
Are there specific negotiation strategies that work better than others?
Negotiation strategies vary based on several factors: the importance of the deal (scarcity of the item or service, cost, etc.); the duration of the engagement; relative bargaining power; the availability of alternative suppliers/other customers; the distance between party positions; and the importance of the business relationship vs. particular transaction.
Understanding each party’s interests in the negotiation is crucial to the negotiation itself and will give you a better understanding of the process.
Know your position
During negotiations, have a clear idea of your best alternative to a negotiated agreement (BATNA). This is your plan B. If you find yourself in a deadlock or don’t like how the negotiations are going, having a BATNA can give you the confidence to walk away.
Ask yourself these questions: What do you want? What do you need? Where can you make concessions and where not?
Once you’ve set your goals, it’s time to develop your limitations. Constraints can be anything from technical to financial to supply chain issues.
Understanding your objectives and limitations can help you decide what to leverage and what not.
Know your party’s position
Research is essential to know who you are negotiating with. Don’t be afraid to ask questions and carefully read the responses to the other party’s proposal. This can give you a better idea of what they are looking for in their negotiation.
Set and manage expectations
Expectation management and sharing certain information can influence a party to change its position. By making extreme demands, the negotiator anchors the other party’s expectations much closer to what the demanding party wants than what might otherwise be equitable.
Related: Great leaders do more than manage expectations, they align them
Communication is key
Use internal communications to spread information, test potential compromises, and learn about position changes.
Use external communication to maintain interest in the agreement, to take or change positions, resolve misunderstandings, and manage emotions.
Negotiate contingencies to be included in the agreement
Negotiating contingencies should be done as a general principle. The purpose of a contract is to establish the obligations of each party and to outline a course of action. Addressing contingencies adds to the length of a contract. Still, clarity is often helpful in reducing uncertainty and having a predictable outcome for when or how a contractual relationship will proceed and end.
Knowing how to negotiate is one of the most important tools an businessupdates.org can have. A basic understanding of negotiation can help you clearly identify your goals and know when to say yes or when to walk away.