Negotiating a Transaction

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Transactions have a conceptual similarity with compliance, in that they both involve your company’s relationship with another party.  In a transaction, the party is a private entity; in compliance, the other party is the government.  A transaction is ultimately memorialized in a contract, which establishes “private ordering” or the rules governing the parties’ relationship.  Compliance, on the other hand, involves existing rules (in the form of laws or regulations) enacted by the government.

For large or complex transactions, the parties should first negotiate the key terms of the deal, which will be reflected in a term sheet or letter of intent.  The purpose of a term sheet is to ensure there is a “meeting of the minds” before the parties invest a lot of resources in drafting a contract.  Additionally, while a term sheet is typically not legally binding, it makes it harder for a party to renege on a key part of the deal at the last minute.

Here are some concepts I’ve found helpful in negotiating transactions (thanks to Richard Pascale—formerly of Stanford Business School—and Fisher and Ury’s classic “Getting to Yes (http://en NULL.wikipedia NULL.org/wiki/Getting_to_YES)”):

  1. Listening: At the outset, you should listen more than you talk.  Gather as much information about the other party’s needs, strengths and weaknesses as you can.  Let the other party talk.  Make empathic inquiries.
  2. Leverage: From your listening, you’ll get a better sense of who has more leverage, and for whom it would it be easier to walk away.  In an ideal word, you’ll have a backup deal available if this one doesn’t work out.  This will increase your leverage and your implicit threat to walk if you don’t get what you want.
  3. Underlying Needs: Get clarity re: the underlying needs of both parties (these may be different than their stated positions).
  4. “Free Ice in Winter”: At the outset, try to agree on as many “win-wins” as possible.  These are ways for each party to meet the other’s underlying needs at very low cost.  What’s important to you, but not important to the other party, and vice-versa?  Early win-wins establish a cooperative tone which should help with the tougher negotiations to come.
  5. “High Aspirations Within the Range of Reason”: For what you want to achieve, set a goal that’s aggressive but reasonable.  Fuzzy or small goals create suboptimal results, while unreasonable demands decrease your credibility.
  6. “Reservation Price”: The flip side of your “high aspirations” is your “reservation price” or your walkaway.  At the outset, should have a clear sense of the least favorable result that you can still accept.

Once you’ve negotiated the key transaction terms, you’ll embody them in a non-binding term sheet that both parties sign, and then begin the negotiation of the contract.

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