Business Negotiation

Once it becomes evident that there is an opportunity for a business deal, the buyer and seller of a business need to come together and negotiate the details of that deal. Negotiation is the process where the different parties work out a mutually beneficial agreement regarding the businesses value and conditions of the share ownership change. The study of negotiation draws on ideas from game theory (for the theoretical outcome between purely logical negotiators) and psychology (for the emotional and human angle). Game theory often assumes perfect knowledge of all mitigating factors that could affect the deal. Unfortunately, in business negotiations at least some of that knowledge is unattainable (or even suppressed) or interpreted differently by the negotiating parties. Also, the effects of emotions (especially negative ones) on negotiations distract from the logic of game theory. These two factors form the greatest unknowns in predicting the outcome of a negotiation.

The intentions of the negotiating parties generally guide the ethos of the negotiation and its progress. If all parties are intent on finding a mutually beneficial arrangement and are willing to make concessions, the negotiation will generally lead to innovative and collaborative solutions to problems that could derail the deal. If one of the parties intends to “beat” the other, the spirit of the negotiation will be much more competitive and confrontational and is likely to leave all participants feeling battered. The adage: “it’s not a fair deal until both parties are willing to give up on it” comes from this confrontational approach. Both approaches are used during business negotiations depending on the strength of the respective negotiators’ positions and the likelihood that the negotiators will work together after the deal is concluded.

Confrontational Negotiations

Confrontational business negotiations come about for several reasons:

  • One party is in a weaker negotiating position than the other (e.g. the business is not doing as well as it could or the buyer is short on funds).
  • The buyer is not likely to work with the seller after the deal is done (i.e. s/he is buying the entire business or buying the sellers share).
  • One party is naturally confrontational, suspicious or unwilling to yield. This means that the other party will need to apply similar tactics.

When negotiating for a business one generally needs to come to terms on the value of the business given its current state and its future prospects as well as any conditions attached to the business deal. Invariably, the negotiating parties will have different views on the value of the business based on the information and assumptions that they have about the business and its prospects. They will also have different intentions for the business deal. The seller will want to get the maximum value for the business while the buyer will want to negotiate the lowest price. These intentions mean that the negotiators will be naturally inclined to opposition which could in turn encourage one or both of them to use tactics that may trick or lead the other party astray (e.g. Withholding or obscuring information or low/high-ball offers). For negotiators with dubious ethics (especially on the sellers side) these types of negotiations become a balancing act between getting their way by their means and being able to deny culpability after the deal is done (when all information and tactics generally come to the fore). The level of polarisation between the competing intentions (and values) will determine whether a negotiated settlement can be reached and how hard it might be. Negotiations can also be influenced by a previous relationship between negotiators (if the buyer and seller have worked with each other before) or lack thereof (one is less worried about hurting the feelings of someone one is likely to not see again after the transaction is done) as well as the extent of the deal (e.g. buying a portion of a company means one needs to work together afterwards). A collaborative negotiation (see next paragraph) can descend into a confrontational one if one of the parties decides to play dirty later in the process. It is very unlikely to go the other way though.

Collaborative Negotiations

The alternative to confrontational negotiations are ones where both parties are attempting to find a solution where all parties win. The intention of the negotiation is to find a settlement where both parties walk away with a larger cake to share rather than a larger slice of the existing cake. To keep a negotiation in this realm requires:

  • Trust between the negotiators.
  • Good communication skills and controlled emotions in all parties.
  • Open and honest flow of information without ulterior motives or hindrances.
  • The ability to yield in all parties.
  • A belief that a common goal can be attained.

Negotiations in business have a tremendous scope to be win-win because there is no limit to how a deal could be structured. E.g. If a seller wants more money than the buyer has upfront he may be willing to yield on the payment terms. Similarly, a buyer may be willing to pay more if the seller continues for a few months to ensure a smoother ownership change and some training. As mentioned before, collaborative negotiations can descend to confrontational ones and are very unlikely to develop after having started in a confrontational manner.

The effect of emotions

Recent studies suggest that humans suffer from informational overload leading to decision apathy if they need to base their decisions on logic alone. Emotions help us make decisions quickly and they have been shown to be remarkably accurate. Thus emotions can never be removed from a decision to buy a business. That however refers to the emotions relating to the buying decision. The emotions aimed at the opposing negotiator can become a hindrance during the negotiation process (especially the negative ones). If a negotiator’s reactions are driven by emotions, they can eventually lose out in the negotiation because their emotions will betray them or they can be exploited. This is why it’s often recommended to have an emotionally non-involved proxy (such as a business brokers – see “Business Brokers – What’s their purpose anyway?”) during negotiations even with the extra layer of complexity this invariably adds.

Some Best Practices

The “opposing” negotiator

  • Make sure they’re the right person to negotiate with.
  • Get to know and form a rapport with them.
  • Empathise with them and walk a mile in their shoes.
  • Read their body language and emotions and tailor your responses to guide the relationship.
  • Build trust and do not react emotionally.

Get as much objective information as possible

  • Listen and ask questions without turning the negotiation into an interrogation.
  • Pay attention to the analysis of data and how it could be leveraged.
  • Read between the lines. Why might data is difficult to obtain or being withheld.

Be prepared

  • Pre-empt required information and get it ready.
  • Know how far you’ll allow someone to push the deal before you’re prepared to walk away. At very least know your value of the business given the available information.
  • Be open to- and bring new suggestions.

Presenting absolutes will stifle a creative solution

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