Business Management Articles
Negotiating Effectively
Presentation from the 2005 Global Summit of Women
Priti Mehta-Shah
For many of us, “Negotiating” is an activity that is the sole purview of lawyers and those select few individuals who hammer out the details of labour contracts.
Most of us don’t think of ourselves as “negotiators”.
However as Alice just pointed out we all negotiate on a daily basis and 90% of the time we negotiate with people who we deal with regularly.
So if you reflect on the things that we do daily, you soon realize that you negotiate more than you think, whether it is at a business level or at a personal level. Negotiating is more than a key business skill; it is a life skill. Whether you are facilitating talks between leaders of various countries or trying to get your six year old to eat dinner, the basic skills and steps for negotiating are similar.
When negotiating I follow some basic steps. The first step is to:
Do your homework and prepare for the meetings – Spend some time researching the arena you are going to deal in. After having closed over 50 mergers and acquisitions transactions, I can say that the most successful closings were the ones for which I was well prepared. Know your interests, options and what the standards in the arena are, will allow you to negotiate the best deal possible that is fair to both parties.
In the preparation for the meeting, clearly understand your interests; consult with your boss and colleagues to make sure you understand them. After having established your interests make sure that you are true to them during the negotiations. Last week, I went to see a potential client to negotiate my fees for selling his business. The client stated that he had previously engaged another consultant to assist with this assignment; however he was not happy with this consultant and had discharged him. Based on our cost structures, profit margin expectations and business model, my colleagues and I determined prior to the meeting that we would make a reasonable profit at $150,000.
We went to the meeting. The client started the process by telling us how dissatisfied he was with the previous consultant. He also stated that the previous consultant was going to charge $180,000 for closing of the sale of the business. Well, I immediately thought to myself that he was dissatisfied with this consultant and of course now he is getting a better consultant in us and we bring more value to the client and therefore should be worth more than the previous consultant so our fees should be $200,000. I was able to convince the client that we should be worth more than the previous consultant given our track record and credentials. The client agreed, but we did not close the deal that afternoon.
The client ended the meeting by stating that he wanted to think things over and would call me back in a day or two. I did not hear back from him, so a week later I called to follow-up. The client mentioned that he had already agreed that we were worth $200,000 and did not want to go back on his word but he felt that the $180,000 he agreed to pay the previous consultant was unreasonable and now the $200,000 was not sitting well with him. He thought that a fair price, which was the market rate, should be $150,000. At that point I agreed to do the assignment for $150,000 with the added bonus of $50,000 if we were able to sell the business for more than he was expecting.
Thinking back, there are things I could have done in the initial meeting that would have saved us a week of negotiating. Had I been true to my interests, I should have picked up on the reservations he was having and offered other solutions.
Understand the other party – Learn who the other person is, both prior to the meeting as well as during the meeting. People usually react more favourably to what is familiar to them, so communicate at their familiarity. Become aware of cultural differences and show that you understand them.
I recently received a call from the President of a hotel REIT who had just put out a new prospectus and had raised over $100 million. The monies raised are to be used in acquiring limited service hotels across Canada. For the past six months they had engaged top real estate brokers across the country that specialize in the hospitality industry to assist in identifying and acquiring approximately 10 hotels. In the six months, the President felt that the real estate brokers had not had much success. The President then went on to say that they had started talks with a number of the hotel owners but after a couple of meetings talks would end. The President asked if I could help. I thought about it for a minute and then said yes. You see 60% of the limited service hotels are owned and operated by East Indian people……..I of course felt that being East Indian, I could communicate at their familiarity and know and understand the culture. We took on the assignment and started making phone calls to these hotel owners and within two months we had three letters of intent, and are currently in the middle of due diligence and finalizing purchase and sell agreements. What made the difference? I dealt with the hotel owners at the level that is familiar to them in the manner they do business.
Identify the needs of the other side - Next, identify needs of the other party. Again, identification of their needs can be done prior to the meeting and also during the meetings by asking questions. What are the crucial issues to them, both personally and professionally? The more knowledge you have about what is important to them, the more creative you can be in constructing an appealing offer. Money is central to most negotiations, but time, resources, training, terms, expertise and even recognition or some other intangibles are examples of alternative options. Offering those options that have value to the other side can have significant power to influence the outcome of the negotiation.
The example, which comes to mind here, is when I was engaged by a retailer who services Northern Canada and has stores mostly in Aboriginal communities. I was asked by the client to negotiate a lease for a new store in a particular community. The chief and council were building a new mall and my client wanted to lease space in this mall and move their existing store to this location, which was going to be the prime mall in the community. I was flown into the community in a small four seater plane. The chief picked me up at the airport and on the drive to the band office, showed me with pride, his community, noting all the points of interest. He also passed by my client’s old store and told me that he believed that the land on which the store was situated belongs to his community and years ago it had been taken away by my client. We drove through some more interest spots and then he took me to the band office.
There I was met by the councilors who started the meeting with a prayer, a traditional practice in Aboriginal communities. I listened to the chief and council and started to get an understanding of their needs. I understood that they had not arranged financing for this new mall as yet and they needed a signed lease from my client to obtain the financing from the bank in order to proceed with construction of the mall. Well at this point, I thought that I had some bargaining power. However, my client was only able to pay $18 per sq ft to meet the ROI targets set by the shareholders. The chief and council, having done their homework, told me that the market rate was $22 per sq ft. They were adamant that they needed $22 to make their investment work. After having negotiated for three hours it was time to catch my flight back home and we decided to have further discussions at my office in a couple of days.
The next morning while I was in the shower, I thought to myself that this was going to be an impossible task because the chief and council were right that the market rate was $22 and there was no way that my client could meet their targets for their shareholders at that rate. Then a thought occurred to me. I went to the office and called my client. I asked him what they were going to do with the land where the store currently sat and what the value of that land was. The client replied that they were not going to do much with that land because they owned more suitable property in the community if there was a need for future expansion. They also stated that they did not believe the land was worth much to them.
With that in mind, I met with the chief and council next day. I offered them the $18 per square foot and the land where the existing store was situated. They were surprised at the offer, but were thrilled and accepted. They were so overwhelmed with the offer that they made me an honorary community member.
The lesson that I learned from this negotiation is that I had to learn by listening to the chief and council what is important to them and be creative about the solution. Money is not the only thing that mattered in this transaction……….it was the community’s belief and values to own their land that also facilitated the closing of the transaction.
Opening remarks - Opening a negotiation session with some exchange of pleasantries is customary and relaxes both parties. Even in negotiations with co-workers remember to be gracious, but don’t delay the inevitable… they know what you are there for! Remember to show enthusiasm in your voice at all times for what you are negotiating about and also about the other person. According to a study done by Stanford University, the number one reason for electronics sales closing was not because of the product, brand or the price point but because of the enthusiasm shown by the salesperson.
Questioning, Listening and Summarizing - Successful negotiators spend more time in the questioning phase than average negotiators. Get to this sooner and spend more time here. Listen for what people say and what they choose not to say. Paraphrase what you have heard to check your understanding and theirs. People don’t always say what they mean, so offer the opportunity to clarify anything you may have misunderstood. Ask "what if" and comparative questions to help discern the relative worth of different options.
Summarize what you have agreed to as you go and take notes. Trusting your memory compromises your objectivity and brings the people issue back in. What I remember verses what you remember puts us against each other, instead of us together against the issue.
It is very important, especially in lengthy negotiations where various alternatives have been discussed, to summarize and ask for feedback for clarity as you move along to ensure that both parties are moving at the same understanding.
Closing - Complete your negotiations by clearly restating all that you have agreed to, by using the notes you have taken. Written acknowledgement should follow.
I am going to use a personal experience, to demonstrate the use of taking notes and restating what has been agreed to at the end. Last December, my husband and I were in the market for new cars. We went to the neighborhood dealership and each chose a car. My husband was acquiring a car that was currently in inventory at the dealership, my car was going to be shipped in two weeks. We sat with the general manager and negotiated the price for my husband’s car and the lease rate for my car. In establishing the lease rate for my car we discussed various alternatives in terms of the annual mileage limit. For each alternative, I had taken notes on the monthly lease rate that was quoted to me. This process lasted for two hours and at the end, I decided on 20,000 kms annually and went back to my notes and closed by agreeing to the lease rate of $600 per month. I asked for a printed confirmation of this and left, establishing that the paperwork and the car would be picked up in two weeks.
Two weeks later I went to pick up the car and sign the lease agreement. I compared my notes to the lease document that was provided to me. The monthly lease rate was correct but the mileage was documented at 18,000 kms. I advised the leasing manager that he had made a mistake and that the mileage agreed to was 20,000 kms. He advised me that at the lease rate quoted to me the mileage would have to be 18,000 kms. I asked to speak to the general manager. We had a discussion and it turned out that since we were discussing so many different alternatives he made a mistake in quoting the rate for 20,000 kms to me. But because I had all my summarized notes and concluding notes (which was a print out from their system), they were going to honor their agreement that they had previously made.
Good luck and Happy Negotiating!
Priti Mehta-Shah, CA is Senior Vice Presicent of BDO Corporate Finance Inc., based in the Winnipeg office. Priti can be reached at 204-926-7231 , pmehta@bdo.ca.
