How To Prepare For A Negotiation
“The first steps in preparation for negotiation are always the same: establishing goals and objectives, and determining your priorities,” says Carl Lobell, a former senior partner at Weil Gotshal in New York City who represented GE Capital in its deal-making negotiations for over 35 years and has lectured on the subject of negotiation in law schools and other institutions in the U.S. and Europe. He adds, “Carefully defined goals, objectives and priorities shape virtually everything that follows in negotiations.”
A simple way of thinking about goals, objectives and priorities is to imagine you live in Los Angeles but plan to travel to San Francisco. If you identify your goal initially as getting to San Francisco, the next question is whether or not time is of the essence. Let’s say you have an appointment there this afternoon that you can’t miss. In that case, time is more than a simple priority. It’s crucial, and your goal stated more accurately is to get to San Francisco as quickly as possible.
To accomplish that restated goal you will take an early plane. If time is important, but so too is having your car available when you get there, you can take I-5 and satisfy both those priorities. If seeing the sights along the ocean is a more important priority than getting there fast, you’ll take the PCH, stop along the way, enjoy the spectacular views, and satisfy all of your priorities.
The terms “goals” and “objectives” often cause confusion. Are they different or not? Some of the literature uses them interchangeably to mean the same thing. Alternatively, using the same metaphor of a trip to San Francisco, you might think of getting there as your ultimate goal; and you might think of getting to San Jose as today’s goal or objective.
For ease of understanding, I’m going to use the term “goal” only in the context of business deals and to describe major initiatives or targets the business intends to pursue over the course of a year: ie., increase sales by 10 percent, or EBITDA by 15 percent, or grow market share by 5 percent. I’ll use the term “objectives” to describe what you want to accomplish in any negotiation: usually, some balance of price paid, value obtained and risks taken.
The approach I’m going to describe applies to most any negotiation. It applies to an acquisition of a company or a contract with a new supplier. It applies to consumer transactions where the buyer interacts with the seller, whether in person or online, and there is room for compromise. And it also applies to the settlement of litigation, even when on the surface the only questions appear to be how much will the defendant pay and the plaintiff receive.
When your company engages outside counsel to assist with negotiating an acquisition or any other business deal, try to remain patient with questions that seem elementary. This is because the time you spend inside the company (and later with outside counsel) discussing and refining your understanding of what the company wants to accomplish and why is the first essential step in preparing for successful negotiations.
The company’s overall goals must be part of the discussion. The company’s goals will drive everything else you and outside counsel do over the course of your preparation, including specific negotiation objectives and every priority, strategy and tactic you will pursue during the negotiation itself. There simply is no substitute for taking the time at the “front end” to identify and refine negotiation objectives that align with overall company goals.
Some of outside counsel’s questions should concern the steps the company has already undertaken to identify and evaluate the transaction for which you have enlisted counsel’s assistance. These questions may be intended to protect you personally; whether you’re the company’s general counsel, a mid-level manager or executive, or the CEO, you’re accountable to others, including the board. Who are these people and are you sure that they have the same understanding you have of the company’s objectives in the upcoming negotiation? Have they participated in robust discussion already about this transaction, its merits, its risks, and its conformity with the overall goals and strategy of the business?
If the answers to these questions are resoundingly “yes”, sharing the information the company has gathered with outside counsel will simplify and streamline his job immeasurably. If the answers instead are “well, maybe” or “I don’t know” or “no”, it behooves you to go back to the appropriate people and ensure consensus on the company’s negotiation objectives before you go further. In those circumstances, thank goodness outside counsel posed the question.
Outside counsel’s questions will also focus on the substance of the company’s negotiation objectives; and, again, the basic questions are what are you trying to accomplish and why. Digging further, what would be the optimum result of the negotiations? What kind of result is reasonable to expect? What can you aspire to get? What is your “reservation point” (walkaway) and what is your best alternative to a negotiated agreement, or “BATNA?”
Further, what are the sticking points? For example, is acquiring this business so critical to the company’s survival, market share or growth that the company is willing to buy it any price, or only at what the company has determined is a reasonable price? What is the company’s appetite for risk, or aversion to risk? Price and risk are usually the most basic considerations (and framework for contract terms) the negotiation objectives must address.
Once the company’s negotiation objectives are clear and specific enough to serve as guideposts, the next step in preparation for negotiations is to identify and categorize the company’s priorities and the priorities of the other side. Identification of the company’s priorities requires careful examination of all of its negotiation objectives, informed as always by the company’s overall goals. The key in due diligence is to assemble as much information from and about the other side as you possibly can. There’s no such thing as too much information in this context.
Try putting the specific points you’ve identified on paper in the order of their importance. Try doing the same for the other side. The object is to determine what items are essential, what items are only important, and what items can be given away. Put differently, what are my needs, my wants and items that don’t matter to me? What are the other side’s most likely needs, wants and throwaways?
As to the nature of priorities themselves, let’s start with a recurring issue. We have all heard the expression “time is money.” Questions about the importance of both time and money arise all the time. In virtually any situation, you need to be clear about which is more important: time or money?
Tradeoffs in everyday life
The tension between time and money arises in consumer transactions too. Suppose you need to fix an air conditioner in your house. Are you willing to pay more to have it done immediately or can you postpone it and obtain a lower price for the work? As we all know, if someone from whom you want something knows you want it badly, because you’ve conveyed that you’re eager or anxious, it will usually cost you more money than it would have if you’d conveyed only that you’re interested in hearing what they have or can do.
Another example of a tension between priorities that arises for businesses and consumers alike involves tradeoffs between price and quality. Suppose you want to buy a diamond ring for your fiancé. The choices abound. And the vast majority of choices are negotiable. In the process of choosing a diamond you may learn more than you ever wanted to know about the five or six elements that comprise a diamond’s quality. However, that knowledge will enable you to make tradeoffs between, say, clarity and size that ensure you get exactly what you want for the price you want to pay.
Negotiating Litigation Settlements
Negotiations literature tends to distinguish between “transactional” (one-off) and “relational” negotiations (where the parties hope to continue their joint business arrangements). Sometimes, authors point out that the dichotomy isn’t really that simple, because you never know when you might encounter the other side again. To the extent that’s true, the observation applies primarily to the choice of strategies and tactics (ie., how you conduct yourself and treat the other side) which are beyond the scope of this article.
The point I want to emphasize here is that what appears on the surface of a lawsuit as a simple question of how much one side will pay to the other may well present opportunities for a settlement that includes consideration other than a lump sum of money. Say the plaintiff demands $10 million and the defendant regards that amount as in the ballpark but simply doesn’t have that much cash available to resolve this particular matter right now. The defendant may offer $5 million cash and payment terms for the rest, which raises questions of the nature and extent of available security and the plaintiff’s need for immediate cash. Alternatively, the defendant may offer $5 million in cash and $5 million in the stock of the corporation he runs or a membership or economic or other interest in the partnership that owns his business, all of which raise questions of value and liquidity.
You won’t know whether such opportunities exist or be in a position to introduce or react intelligently to them unless you pursue the same avenues of diligence described above. Is the defendant company cash rich or cash poor? What is the market value of its stock if it’s a public company and, if not, are the shares in a private corporation or interests in partnerships marketable at all and, if so, at what price? What are the prospects of the defendant’s business, regardless of its legal form? Does the plaintiff need money right away to recoup damages for catastrophic injury or cover expenses? Or can the plaintiff live with payment terms or money substitutes such as I’ve described? In the litigation context, too, research sufficient to enable you to analyze both sides’ needs, wants and throwaways may help you turn a seemingly intractable problem into a negotiated resolution that works for both sides and may even add value.