Claiming Value in Negotiation : Part 2

Negotiation Genius: How to Overcome Obstacles and Achieve Brilliant Results at the Bargaining Table and Beyond
by Deepak Malhotra, Max H. Bazerman

(Page 2 of 2)

Apart from being the highest offer you have received, this deal interests you because of Quincy Developments' reputation for bargaining in good faith. While this gives you some confidence that the offer is reasonable, you are not necessarily ready to accept it as is. You expect that you could negotiate the price up an additional 10-15 percent if you chose to pursue the offer. You do not think that Quincy Developments would go any higher than that.

For now, however, you have chosen not to negotiate with Quincy Developments. Why? Because Estate One, a premier real-estate company in the region, has just sent word that it is also interested in the Hamilton property. You believe that Estate One would develop the property for the construction of luxury condominiums, as it does with virtually all of its properties. You should be able to negotiate a higher selling price for the Hamilton property if the land is to be used for luxury condominiums rather than for apartment buildings.

You have decided to meet with the CEO of Estate One, Connie Vega, to negotiate a sale. If these talks are not successful, you plan to return to Quincy Developments and finalize a deal. You will not wait for other offers. Quincy Developments has said that its offer expires in three days.

Here is what you know about Estate One: It is a midsize company that is one of the biggest regional developers of residential real estate. Estate One's CEO has been with the company since its founding twenty years ago and is known to be extremely well connected politically, linked to knowledge brokers at all levels of state and local government. Estate One is not a competitor of yours.

To prepare for the negotiation, you have collected as much data as possible. The following information is public knowledge, and is certainly known to the CEO of Estate One:

• Pearl Investments purchased the Hamilton property seven years ago at a price of $27 million.

• Since the purchase, land value in Hamilton has increased substantially. An evaluation of recent sales of somewhat comparable properties suggests that the Hamilton property could be worth $36-44 million if developed for residential use.

• If the land is used for the construction of luxury condominiums instead of apartment buildings, it is probably worth an additional 20 percent.

The impending Hamilton negotiation raises many questions. What would you do first in this negotiation? How would you approach the CEO of Estate One, Connie Vega? Would you make the first offer or would you let her make it? What information, if any, would you share with her? What information, if any, would you try to acquire from her? How much would you expect to earn on the Hamilton sale? How would you know if you got a good deal?

Preparing to Negotiate

Over the course of training and consulting with tens of thousands of negotiators and dealmakers, we have become aware that, by far, the most common and costly mistakes in negotiation take place before talks even begin. Interestingly, the problem is usually not faulty preparation, but a lack of preparation altogether! Under the false assumption that negotiation is "all art and no science," most people fail to prepare adequately for negotiation. When coupled with the belief that the "real action" begins at the bargaining table, even smart, thoughtful, and motivated people walk into substantive negotiations ill-prepared.

Thus, it is critical that you adopt a thorough methodology to help you prepare to negotiate. Our five-step pre-negotiation framework offers a simple yet effective approach. (In the chapters that follow, we will add to this list as we confront more complex negotiations.)

Step 1: Assess your BATNA. The first step in any negotiation is to ask yourself, "What will I do if the current negotiation ends in no deal?" In other words, you need to assess your BATNA, or best alternative to negotiated agreement - the course of action you will pursue if and when the current negotiation ends in an impasse.3 Without a clear understanding of your BATNA, it is impossible to know when to accept a final offer and when to walk away in order to pursue other options. Your BATNA assessment requires the following three steps:

1. Identify all of the plausible alternative options you might pursue if you are unable to reach an agreement with the other party.

2. Estimate the value associated with each alternative.

3. Select the best alternative; this is your BATNA.

In the Hamilton case, you have a number of alternatives if the negotiation with Connie Vega ends in impasse: you might wait for other offers, you might approach Quincy Developments to finalize the deal, or you might decide not to sell at all. The information available to you strongly suggests that your BATNA would be to finalize a deal with Quincy.

Step 2: Calculate your reservation value. An analysis of your BATNA is critical because it allows you to calculate your reservation value (RV), or your walk-away point in the current negotiation. As the seller in the Hamilton case, your reservation value is the lowest offer you would be willing to accept from Connie Vega. What might this offer be? If the negotiation ended in impasse, you would return to Quincy and finalize the sale. Quincy has offered $38 million. Is $38 million your reservation value? Not quite, because you could negotiate this price further with Quincy. Specifically, you believe that you could negotiate a 10-15 percent increase in the offer, yielding an amount ranging from $41.8-$43.7 million. Your reservation value should fall within this range.

Copyright © 2007 by Deepak Malhotra

About the Author

Deepak Malhotra is an associate professor at the Harvard Business School, where he teaches negotiation in the MBA program, the Advanced Management Program, and the Owner/President Management Program, in addition to providing negotiation consulting and training for businesses worldwide.

Max H. Bazerman is the Jesse Isidor Straus Professor of Business Administration at the Harvard Business School and the author of Negotiating Rationally and Judgment in Managerial Decision Making, each of which has sold more than 100,000 copies.