Contract Negotiations


Inevitably, in business or in life, you will need to negotiate a contract. This applies to everything from structured agreements, such as selling your company, to everyday negotiations, like getting your buddy to agree on a travel itinerary.

1. Control the first draft.

It will probably raise your legal fees, but try to be the party that drafts the initial document. By doing this, you set the benchmark for the direction of the negotiation.

For a simple example, imagine if you walked into a store and saw a T-shirt without a price tag. You might think it's worth $10. Now imagine, upon walking in, you notice a $50 price tag and some frilly marketing spiel. Moreover, the salesperson walks over and implies that there's room for negotiation. In your mind, the benchmark for the shirt is $50. So maybe you'll be bold and come back at her with half of that: $25. She'll agree to $30. You'll believe you knocked a whopping 40 percent off the price. But in fact, she just sold you a $10 T-shirt for $30.

The downside is that showing an extreme price might discredit you and cause the customer to walk away outright. In retail, this is the sticker-shock factor that causes many customers to leave without even trying to haggle. But for a meaningful transaction, odds are that you've already built some rapport with the party and you'll always be able to bring them back to the table.

2. Ask for the kitchen sink.

This goes hand in hand with controlling the first draft, but ask for everything you possibly can from the get-go. In other words, make a list of all the realistic things you might want (and ones you personally don't want but someone in your position might) and include those in the draft. If the other party accepts them all, great! If it doesn't, now you have a bunch of items that you can give up without seriously impacting your position. When you cave on all those items, the other side feels like it's winning even though you aren't giving up anything substantial to you.

3. Keep the relationship healthy.

Negotiations are done between people. People have feelings. If the other party believes you are a bloodsucking as*h*le, he or she will be extremely firm and might even walk midway. You need to make sure the party likes you. This means that you need to establish a good relationship prior to the negotiation and, if the negotiation itself gets hostile, have another party take the blame as the cause of the discomfort. This may be your attorney, your business partner, your spouse, or anyone who won't need to have a healthy relationship with the counterparty after the transaction is completed.

You are the lead in the negotiation. You are the relationship. You are the "good cop." Don't lose that.

4. Make sure the other party can look good.

This applies to negotiations where you will need to work with the other party after the deal is done. Even if you have the power to win a negotiation, make sure to let the opposing party keep her dignity. Make sure there is some part of the contract that she can take to her boss and announce a concession she got from you. If she feels completely defeated and looks bad in front of her boss because of your deal, she will make life miserable for you going forward.

This also applies in negotiations where you have the upper hand but the other party has the option of walking away from the table. Trust me: Your counterparty would rather walk away with no deal than a deal that makes her look bad. Make sure she wins at least something.

5. Go for the decision maker.

Don't waste your time dealing with analysts or associates at the start of the negotiation. They will only dig into details and find reasons to derail your process because they are paid to do diligence. Instead, work your relationships and social angles to get to the head decision maker from the start. Only after he gives you the general nod on the deal should you work with the rest of his team to iron out the numbers. At that point, the junior folks can make the deal less favorable, but they will have a much harder time walking away because they've already been chartered with bringing the deal to fruition.

6. Involve an intermediary.

While you may feel emboldened about going face-to-face with your counterpart and quickly coming to a resolution, doing so also exposes you to being cornered and acquiescing to a term you might later regret.

Instead, try to involve a third party to be your voice in important negotiations. This could be an attorney, a broker, an investment banker, or another party who has incentives aligned with yours. If the conversation gets heated or the other party gets the upper hand, your agent always has an out that you'll never have: She can always say she can't make a decision without consulting you (or that she misspoke at an earlier meeting because she misunderstood the bounds you had provided her).

If you prefer to be in the room, then always have someone not present that you can reference as a decision maker you'd need to consult. For a car or home negotiation, this may be your spouse. For corporate negotiations, this could be your lead investor or chairman of the board.

7. Learn everyone's real motivations.

Take the time to learn the other party's backstory. How did he personally arrive at his current position? Where does he envision his company in five years? How is his family doing? While the answers to these questions might not be directly relevant to the negotiation, they help you learn the underlying motivations that direct the other party's decisions.

If the other company's executive vision is on profitability, it will be evaluating your deal very differently than if its focus is on brand building.

Sit back and take the time to listen. While the conversation may go off topic, every little cue you pick up will be helpful as you structure your deal (and frame your demands).

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