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Whether you are negotiating agreements with vendors, investors or landlords, the art of negotiation is a vital skill to learn for any business owner or startup founder. Let’s look at how to negotiate agreements, why negotiation is essential and how you can best utilize leverage to get the fairest deal possible.
For any newly-established business, there are four main categories of agreements that you can expect to negotiate:
- Customer and vendor contracts
- Investment funding contracts
- M&A contracts
- “Partnership” type agreements (typically considered to be referral agreements, distribution agreements, sales rep agreements, etc.)
We’ll cover all of these topics, but for this article, when we say “commercial agreement,” we are referring to customer and vendor agreements.
Every business needs customers and vendors, 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 disputes less likely. They also ensure that you are protecting your intellectual property (IP) by making clear who owns any IP created in the future or that already exists. There are also confidentiality provisions in contracts that protect your trade secrets.
Written contracts also help to mitigate risks. For example, you can include indemnification provisions that require the other party to pay your costs if you get sued because of something the other contracting party did/didn’t do.
Negotiating 101: The Basics
Why is it important to negotiate a commercial agreement? Negotiating a commercial agreement not only protects your and your business’s interests, but negotiation is an important tool that helps define each party’s obligations and addresses what will happen if one or more parties fail to fulfill them. Without these clarifications, costly disruptions may occur, potentially leading to protracted dispute resolution.
Protect your interests
It is paramount that you protect your interests. When collaborating, each party will have different objectives and interests in the deal. A seller will be focused on receiving payment and will not want payment delays or additional obligations. A buyer will focus on what will be received and want safeguards to maximize the value of what is being received. A buyer will also want protections if the seller does not 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 fulfill them. Without these clarifications, costly disruptions may occur, leading to protracted dispute resolution.
Each party to a contract will want to shift risks and responsibilities to the other party as much as possible. This limits their own obligations and gives them more leverage against the other party to secure their interests.
Negotiating an agreement provided by another party is an important way to balance the transaction risks; it helps make them more manageable and the agreement more valuable to the party receiving the contract.
Ensure important contract details are included
Each party to a commercial agreement values different elements of that agreement. Promises are often made during negotiations that a party will rely upon as crucial to making the deal. They may include timing, pricing incentives, delivery details, intellectual property ownership, support services or performance promises. These promises or additional details might not be included within the contract and ultimately presented for signature. Without negotiation to ensure these promises or details are included in the contract, the company depending on them may not receive them.
Fairness is key
If only one party’s objectives or interests are met, it often results in an imbalanced relationship. Significant imbalances do not favor stable or sustainable business relationships or cooperation during the term of an agreement.
It’s also critical to reduce confusion and potential conflicts. When both parties to a contract provide input as to the parts of the agreement they value, it reduces the potential for misunderstandings that would damage 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 length of engagement; relative negotiating power; the availability of alternative suppliers/other customers; the distance between party positions; and the importance of the business relationship vs. particular transaction.
Understanding the interests of each party in the negotiation is crucial to the negotiation itself and gives you a better understanding of the process.
Know your position
When in negotiations, have a clear idea of your best alternative to a negotiated agreement (BATNA). This is your Plan B. If you’ve reached an impasse or do not like how negotiations are moving, 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 offer concessions, and where can you not?
Once you have established your objectives, it is time to develop your limitations. Limitations can be a litany of things, from technical to financial to supply chain issues.
A firm understanding of your objectives and limitations can help you decide what you are willing to leverage and what you can’t.
Know your party’s position
Research is key when it comes to knowing who you are negotiating with. Don’t be afraid to ask questions and carefully read the other party’s proposal responses. This may give you a better idea of what they seek 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 expectations of the other party far closer to what the demanding party wants than what might otherwise equitably occur.
Communication is key
Utilize internal communications to circulate information, test potential compromises and learn about position changes.
Use external communications to ensure interest in the agreement is ongoing, establish positions or changes to them, resolve misunderstandings, and control emotions.
Negotiate for contingencies to be included in the agreement
Negotiating contingencies should be done as a general principle. The purpose of a contract is to set each party’s obligations and outline a course of behavior. Addressing contingencies does add to the length of a contract. Still, clarity is often helpful in reducing uncertainty and having some predictable outcome for when or how a contractual relationship will progress and conclude.
Knowing how to negotiate is one of the most vital tools a business owner can have. A basic understanding of negotiating can help you clearly identify your goals and know when to say yes or when to walk away.