Accept or Reject? Sometimes the hardest part of negotiation is knowing when to walk away. BY DEEPAK MALHOTRA IT WAS A CLASSIC CASE of a business partnership gone awry. After building a profitable construction company together over several decades, Larry Stevenson and Jim Shapiro recognized that their differences had become irreconcilable. Stevenson wanted to buy out Shapiro, who was willing to sell for the right price. After months of haggling and legal maneuvering, Stevenson made his final offer: $8.5 million for Shapiro's shares in the company. The company is worth about $20 million, Shapiro thought to himself. | own 49% of the shares. Heck, | helped build this company. I'm not going to accept anything less than my fair share—$10 million, I'd rather fight in court than accept $8.5 million. Shapiro rejected the offer, and each party prepared for a trial Shapiro's rationale for rejecting Stevenson's offer seemed reasonable enough. Furthermore, Shapiro’s lawyers assured him, a court ruling very likely would be in his favor. In fact, as we will see, Shapiro made the wrong choice. He could have figured this out if he had assessed his BATNA—his best alternative to a negotiated agreement. A negotiator’s BATNA is the course of action he will pursue if the current negotiation results in an impasse. An evaluation of your best alternative to a deal is critical if you are to establish the threshold at which you will reject an offer. Effective negotiators determine their BATNAs before talks begin. When you fail to do so, you're liable to make a costly mistake—rejecting a deal you should have accepted or accepting one you’d have been wise to reject. In negotiation, it’s important to have high aspirations and to fight hard for 2 good outcome. But it’s just as critical to establish a walk away point that is firmly grounded in reality. Assessing your BATNA. To determine your BATNA in a given negotiation, follow these four steps: 1, List your alternatives. Think about all the alternatives available to you if the current negotiation ends in an impasse. What are your no-deal options? 2. Evaluate your alternatives. Examine each option and calculate the value of pursuing each one. 3. Establish your BATNA. Choose a course of action that would have the highest expected value for you. This is your BATNA—the course you should pursue if the current negotiation fails. 4, Calculate your reservation value. Now that you know your BATNA, calculate your reservation value—the lowest-valued deal you are willing to accept. If the value of the Page 1 of 9deal proposed to you is lower than your reservation value, you'll be better off rejecting the offer and pursuing your BATNA. If the final offer is higher than your reservation value, you should accept it. To assess his BATNA, Shapiro first should have obtained the following information from his lawyers: estimated litigation costs, $500,000; his likelihood of winning in court, approximately 70%; and the fact that if he won, he would receive $10 million for his shares, whereas if he lost, he likely would receive only $3 million. Next, Shapiro should have used this formula to deter-mine the actual value of his BATNA: (0.7 x $10MM) Value if he wins in court + (0.3 x $3MM) Value if he loses in court —$500,000 Cost of litigation $7.4MM Shapiro should then have determined his reservation value for the negotiation with Stevenson: What is the least he would accept? It’s worth noting that, after the trial was well under way, Shapiro came to believe that he should not have rejected Stevenson's offer. “I still think the offer should have been higher,” he said, “but if | could go back, I'd accept it. Righteous indignation is worth something, but it’s not worth $1.1 million.” Now that we have covered the basics, let’s consider two common BATNA-related mistakes that even savvy negotiators who have assessed their BATNAS sometimes make. Failing to monitor your changing BATNA Two computer software companies, Technolink and Ethermax, were battling over the acquisition of an offshore development firm, Soft Servers. An acquisition of Soft Servers would help Technolink integrate vertically, realizing significant cost savings. For these reasons, Technolink valued Soft Servers at $150 million. Meanwhile, Ethermax, a new start-up, saw acquiring Soft Servers as a way to enter Technolink’s market. As a result, Technolink was willing to pay more than Soft Servers was worth—an additional $50 million, or up to $200 mil-lion—if the acquisition could prevent Ethermax from emerging as a formidable competitor. The bidding war opened high at $120 million and heated up quickly. After Ethermax put in its third bid, $158 million, Technolink made an offer of $163 million. At this point, Soft Servers informed Technolink that if it raised its offer to $170 million, Soft Servers would close the auction and guarantee the acquisition to Technolink. Technolink’s top management met overnight and, the next morning, offered Soft Servers $168 million. The offer was accepted, and executives from both companies were thrilled Page 2 of9with the deal. Yet, interestingly enough, Ether-max’s top management was even more ecstatic. Why? Unbeknown to Technolink, after Ethermax offered $158 ion for Soft Servers, it retreated from the bidding war and quickly (and quietly) acquired ProxyServe, one of Soft Servers’ competitors. Having recently been acquired by a company called ConsumerWare, ProxyServe was off most industry players’ radar. But impending antitrust litigation had forced ConsumerWare to relinquish its hold on Proxy-Serve. Unlike Technolink, Ethermax had closely monitored the deal and the antitrust proceedings. The end result? Ethermax won on all fronts: it acquired ProxyServe at a relatively low price, it entered Technolink’s industry, and it forced Technolink to overpay for Soft Servers. Technolink had shelled out $168 million for a company that it now valued at only $150 million. The moment that Ethermax found a new way to enter the market, Technolink’s initial BATNA analysis became moot. Instead of monitoring moves away from the table and reevaluating its BATNA accordingly, Technolink accepted a deal that it should have rejected Negotiations take time. Some last months, even years. Throughout the process, good negotiators stay focused on the other side of the table. Great negotiators stay equally alert to what happens away from the table. New competitors enter the industry. Laws and regulations pass or expire. Power shifts from one political party to another; alternatives shift or disappear. Throughout a negotiation, think about whether you're considering all the factors that affect your BATNA—and whether it may have changed. Confusing your BATNA with what you think is fair Negotiators usually have strong feelings about faimess. Unfortunately, our faimess perceptions tend to be biased in a self-serving manner. Research has shown that, at the end of a negotiation, most people feel they were more co-operative than the other side, that they deserved more than they got, and that the other side made fewer concessions than they did. Such distorted beliefs can lead to overly rigid bargaining positions and unrealistic demands. As talks drag on, a negotiator can become fixated on what he considers to be fair and, in the process, lose sight of his BATNA. We saw what happened to Shapiro when he was unwilling to ac-cept anything less than his “fair share” ($10 million) de-spite the fact that his BATNA (going to court) was worth considerably less than that. In negotiation, it’s important to evaluate how much your fairness concerns are worth to you. Sometimes you may be willing to sacrifice money in the pursuit of fairness. But vague, self-serving notions about fairness can cloud your BATNA analyses and decision making. Shapiro, for example, was quite sure that he didn’t want to pay more than a million dollars to stake a fairness claim, yet that’s exactly what he ended up doing Page 3 of 9Interestingly, our beliefs about fairness can also induce us to accept deals we should reject. A trip to the car dealer-ship is a classic case. Suppose that, after test-driving a few different cars, Olivia decides that she wants to buy car X, which has a sticker price of $34,000. Her BATNA is to buy the cheaper, somewhat less appealing car Y from a different dealership. She conducts a simple analysis to come up with her reservation value: Estimated cost of car Y $26,500 + Extra value associated with having carX : $4,500 Maximum willingness to pay for car X : $31,000 At the dealership, Olivia haggles with the salesperson, who grudgingly lowers the price to $33,000, Not good enough, Olivia tells him with a friendly smile. After going off to “consult with the manager,” the salesperson tells Olivia that, with great difficulty, he has obtained approval to reduce the price by $750. After 20 more minutes of painstaking negotiation, Olivia secures an absolutely final, “we're not even really allowed to do this” concession—an additional $250 reduction. The final offer is $2,000 below the sticker price. Should she take the car or run? Regardless of whether the salesperson truly has gone as low as he can, the car costs $1,000 more than Olivia was willing to pay for it when she walked into the dealership. Yet for several reasons, she’s likely to feel pressured to accept the deal. First, because the salesperson made some concessions, Olivia may feel obliged to reciprocate. Second, by the end of a grueling negotiation, Olivia may well have forgotten all about her reservation value. Finally, the salesperson has appealed to Olivia’s sense of “fairness,” arguing that he's given her a “steal” deal When a final offer does not meet your reservation value, none of these reasons is relevant to the decision of whether to walk away. If your BATNA analysis hasn’t changed, your reservation value shouldn’t, either. A critical first step in any negotiation is to assess your BATNA and the point at which you should walk away. It’s also important to analyze the other side’s BATNA: What will she do if you reach an impasse, and how will her behavior affect you? DON’T FORGET ABOUT THE OTHER SIDE’S BATNA Imagine you're the CEO of a small financial services firm. Due to a series of misunderstandings—and, you suspect, some deceit—you wish to end your business relationship with a longtime contractor. Before you part ways, the two of you decide to discuss whether your relationship can be salvaged. As an experienced negotiator, you sit down to assess your BATNA before the meeting. You calculate the cost of finding and hiring a new contractor, the amount of time it will take that contractor to get up to speed, and so on. You decide that, if your old contractor does not agree to a minimum number of improvements to your existing contract, you'll walk away from the negotiation and take your business elsewhere. Page 4 of 9Unfortunately, the meeting doesn’t go so well. When the contractor refuses to make any substantive concessions, you announce that you're terminating the relationship. You shake hands and part company. The next morning, your lawyer calls with terrible news: Your contractor is suing you for breach of con-tract. Clearly, your BATNA was not as simple as you thought it was. While you gave a lot of thought to what you would do in the event of an impasse, you ignored an equally critical question: What would the contractor do if you failed to reach a deal? In the absence of a deal, all parties are likely to pursue their respective BATNAs. You must take the time to assess the other side’s BATNA, which can affect your alternatives and the values associated with them. ignoring the relationship between your BATNA and the other party's BATNA can be extremely costly. Aim high once talks commence, but keep an eye on your potentially changing BATNA, and do what you can to keep and strengthen your no-deal alternatives + eeENDEHE Page 5 of 9Better or Best: Keeping Your Options Open When confronted with deals that look equivalent, how do you keep them alive until the optimal course becomes clear? BY MICHAEL WHEELER JIM, A WELL-REGARDED residential developer operating out-side Philadelphia, has been scouting around for a site for his next project. Two properties seem promising. The Abbott estate consists of 75 acres of woodlands and some overgrown fields. The executor of the estate is asking $1.65 million, though the price may be negotiable. The other site, a former apple orchard of about 100 acres, was acquired by a local bank through a foreclosure. The bank is preparing to list the property but has yet to set an asking price. An optimist by nature, Jim believes he could make either deal work. But without knowing exactly what he'd need to pay for each, how can he determine which property is the better value? How can he judge success in his negotiations with one seller without knowing what the second seller might be willing to do? Jim is facing linked negotiations, each of which presents special strategic and tactical challenges. (See the sidebar “Linked Negotiations” for descriptions of three categories of such talks.) This article focuses on “birds in the bush” — situations in which, like Jim, you have more than one promising option to consider. Choice should be a blessing in negotiation, of course. But picking the best possible deal takes careful planning. The set of techniques outlined here will put you on the right path. Beyond BATNAS According to basic negotiation theory, Jim's BATNA—his best alternative to a negotiated agreement—should be his benchmark. He's supposed to compare what he’s been offered at the bargaining table with the best he could get if he walked away. If negotiation would give him more, then that's all upside. If not, there’s no reason to agree. It’s a twist on the old “bird in the hand” adage. If you've already got a golden goose, your negotiating partner has to offer even better terms to get you to say yes. But if all you're holding is a dead duck, you may have to take whatever your counterpart offers you Yet when negotiations are linked, BATNAs are rarely this cut-and-dried. Judging success with one seller is virtually impossible when you don’t know what the second seller might be willing to do. Jim doesn’t have a sure fall-back. if talks with one side go poorly, his BATNA is the un-certain prospect of negotiating with the other side. You can move beyond your BATNA and successfully navigate this type of linked negotiation by following five key steps: (1) find the equalizer, (2) assess feasibility, (3) hone your leverage, (4) drive the process, and (5) take the plunge. Page 6 of 91. Find the equalizer To begin his analysis, Jim should look at each property in-dependently, as if the other didn’t exist. He needs to reckon the maximum he would pay for each—not his goal or expectation but the upper limit he could live with and still make his development project work financially. Because the properties vary in acreage and have unique features, he'll likely come up with two different numbers. It might make sense to pay more for the orchard parcel, for example, if he can put more units on it or if its better view would garner higher prices from homebuyers. Comparing the two sites, he might justify a maximum of $1.5 million for the Abbott estate and $1.8 million for the orchard property. If Jim has taken both monetary issues and personal satisfaction into account, then the two deals should be equivalent at his stipulated upper limits. That’s because each figure is generated against the same no-deal aiternative— in this case, continuing to search for a viable site. The next step is to double-check your calculations by comparing the hypothetical deals. If Jim discovers that he'd subjectively prefer the orchard property, then he should tweak his upper limits—raising his maximum payment for the orchard, lowering what he'd pay for the Abbott estate—until he truly equalizes them. At this point, each should barely be feasible, and he should be indifferent between the two. Finding the equalizer lets a negotiator compare apples and oranges. If Jim can shave $200,000 off the price of one parcel, he'll have to get a comparable discount on the other. The equalizer thus serves as a rolling BATNA as the negotiations unfold. 2. Assess fe: ity Having two birds in the negotiation bush is better than one. But what if the birds are perched on different branches—one almost within grasp, the other poised to fly away? Do you try for the deal that’s about to vanish or go for the surer thing? In such situations, you'll need to weigh two important factors. First, is time more critical in one case or the other? Maybe there’s a win-win possibility if Jim can quickly forge a deal with the bank and spare it the expense of put-ting the orchard on the open market. On the other hand, Jim might act differently if he hears of a competing bidder for the Abbott estate. The more urgent one deal may be, the less relevant the other becomes, at least in the short term. A possible fallback may provide some psychological comfort, but without a realistic sense of its feasibility, it’s not really a useful benchmark. Second, you must figure out if going after one deal helps or hurts your odds in the other one. Sometimes there’s no effect. For example, bidding for a condo at one resort won't affect your opportunities in other locations. But when relationships are at stake, courting one prospect may mean forsaking others. Page 7 of 9Sometimes going after one negotiation bird improves your chances of nabbing the other. Consider the experience of a friend who was recently shopping for a new car. He'd always had good luck with Fords and was inclined to stick with them, especially after driving the latest model. After some back and forth, the salesman quoted a price that was OK but not great. My friend said he'd think about it and headed to a nearby Dodge dealership. He took 2 Durango for a test drive—right back to the Ford lot, parking next to the Explorer he'd been looking at moments earlier. The salesman dashed out of the showroom. “What are you doing?” he said. “Comparison-shopping” was the genial answer. “Look,” my friend said, “the Durango actually has better headroom.” Desperate not to lose my friend’s business, the Ford salesperson went through the ritual of shutting the doors of both cars. The Explorer’s door made a satisfying thunk. “You can hear that quality,” he said, though clearly his heart wasn’t really in his patter. Within 10 minutes, the salesman dropped the Explorer's price by another $1,400, and my friend bought the vehicle. 3. Hone your leverage Suppose that the Abbott and orchard properties seem equally promising, and there’s no urgency regarding either one. If negotiation were costless, Jim could keep both options fully open. But serious preparation takes time and money. Jim may have to hire a lawyer to review land-use regulations and an architect to do preliminary site plans. He'll also have to check on the availability of subcontractors for different phases of construction. It might seem pointless for Jim to double his expenses and meetings when he needs only one parcel of real estate, not two. Shouldn’t he arbitrarily pick one potential deal and put his best effort into it? Not necessarily. Unless Jim is certain that he can close a specific deal, he may need a fall-back. In addition, Jim might be able to secure better terms from the Abbott estate if the executor knows he's also looking at the bank's orchard. This may increase the odds of impasse on that front, but the risks may be justified Conversely, if the orchard option begins to look as if it won't pan out, Jim might negotiate more cautiously with the Abbott executor. In short, your investment in the deal you don’t reach isn’t wasted if you've gained leverage in the agreement you do make, 4, Drive the process Whenever you have more than one trading partner, you're operating in a micro market. You may be able to make it function to your advantage, but you have to be prepared for a downturn. If the local real estate market is slow, Jim may be the only serious prospect for a large tract. Both sides will know that if they don’t reach a deal with Jim, they may incur holding costs for a painfully long time. IF Jim is lucky, he might persuade one seller to underbid the other. Page 8 of 9Yet Jim should be careful not to overplay his hand. If he’s too aggressive, he might unwittingly encourage the two sellers to collude. He also must consider his long-term relationships and reputation. Price concessions might come back to bite him when he seeks building permits or launches his marketing effort. Given that each seller may be dealing with other potential buyers, Jim should imagine the game from their points of view. For example, if one of them senses the market is hot, she might put her property up for open bidding. If she is less confident, she might try a sealed- bid auction with a reserve price. Jim might try to influence the process she chooses by working with a dealer or making subtle suggestions. Or he could decide that his advantage lies in standard talks, since creative solutions might be missed in a straight price deal. As a negotiator, work to define the process before someone else does. 5. Take the plunge The test of success shouldn't be the best imaginable deal, but one that’s good enough. Your, goal is to achieve a substantive outcome, not to negotiate endlessly for its own sake. Along these lines, negotiations on multiple fronts present two practical problems, different sides of the same psychological coin. First, suppose that one of your prospective deals suddenly evaporates. Losing your fallback—even an uncertain one—means that you're operating without a safety net. Nevertheless, don’t overreact and accept unfavorable terms in your one remaining deal. Just because your BATNA is weaker doesn’t mean you're bringing less value to the table. For example, if two potential buyers have bid up the asking price of your house and then one drops out, the other offer shouldn’t go down. In fact, if you sense that the remaining bidder loves the property, you might chance pressing for still more money. Your BATNA may not be good, but it’s possible that the bidder doesn’t have an attractive option, either. Always balance the possible upside against the security and relief of getting the deal done now. The flip side of the coin is not overplaying your hand when you have two eager bidders falling over each other to sweeten their proposals. It’s important to know when to declare a winner, especially when relationships are involved. New MBAs sometimes learn this lesson to their regret when recruiters rescind job offers in the face of demands for special perks. In negotiation, as in life, there's a time to expand our options—and a time to exercise them. + eeENDEHE Page 9 of 9