This is a part 2 in a multi-part series on better negotiation. Did you miss part 1?
Preparation is essential to effective negotiation. If you wish to reach a fair and satisfactory deal, you need to enter the negotiation with a clear understanding of your interests, options, comparative data, and objective criteria.
One of the most important data points to consider is your “Best Alternative to a Negotiated Agreement” (BATNA). The BATNA serves as your “Plan B” to the negotiation. In other words, it is the best option you have and the one you will live with should you leave the negotiation without an agreement.
If you don’t know your BATNA, you may end up taking a deal that is worse than your backup option, or you may walk away from a deal that is better than your backup option.
Determine your BATNA
A simple process for determining your BATNA is as follows:
- Identify your alternatives – brainstorm all possible options you have if the negotiation ends without agreement.
- Assess your options – Review each option and assess its relative value to you.
- Select your best Plan B – Pick the option that is the overall most attractive option.
- Determine your bottom line value – Calculate the “reservation value” of your BATNA. In other words, try to determine a quantitative value of your best option that you can compare to the result of the negotiation.
If you negotiate a result that exceeds your reservation value, you make the deal. If the negotiation result is less than your reservation value, you may be better off walking away.
Evaluate Your Best Alternative Option
Here’s a simple example that will illustrate how important it is to know your best alternative option.
Let’s say you’re a 50% partner in a business. Your partner has expressed interest in buying your share in the company, and you’re ready to sell and move on to a new and exciting venture. The business is independently valued at $10 million, so you are expecting an offer of $5 million. Instead, your partner offers $3 million.
After some negotiation, the offer increases to $3.5 million, but this is as high as your partner is willing to go. Your initial thought is, “this is not a good deal, I’m missing out on $1.5 million.”
Should you reject the deal, a clause in your operating agreement states that the sale value will be determined by a third party arbitrator. Your instinct is to invoke this clause, as you feel that the arbitrator will surely decide that $3.5 million is too low. However, before you make your choice, you choose to evaluate your options:
- Reject the Offer and Stay in the Business - You’ve already made up your mind that you want to move on and you don’t want to miss out on the new venture, so rejecting the deal and staying in the business is not an attractive option.
- Find Another Buyer - You currently do not have any other buyers available, and you assess that it would be difficult and time-consuming to find one. You determine that finding another buyer is currently an unrealistic choice.
- Go to Arbitration – Compared to options 1 and 2, this is currently your best Plan B. However, you realize that you need more information to fully assess this option. After doing some research and speaking to experts, you discover the following:
- In similar recent cases, there is a precedent of arbitrators using a valuation standard of 80% of the amount of the independent valuation.
- The arbitrator takes a fee of 20% of the determined final value.
- Therefore, you assess that the likely result of the arbitration is $3.2 million ($5 million times 80% less the 20% fee).
In this scenario, taking the deal is a better financial option, as the negotiated offer of $3.5 million exceeds your likely best option value of $3.2 million.
This is the second in a series of short posts that will focus on improving your negotiations skills. In our next post, we’ll look at strategies for identifying innovative options that can help break up a negotiation stalemate. Sign up for our newsletter using the form below to be notified when this next post is available.
About the Author
CO-FOUNDER | LEADERSHIP, BUSINESS STRATEGY, MANAGEMENT, COACH, TRAINER, AND FACILITATOR
Seth Sinclair is a leadership coach, management consultant, trainer, and facilitator with a passion for helping his clients achieve their personal and professional goals. Reach out by emailing him at email@example.com or learn more on our About page.