Be a Better Price Negotiator: Have the Courage to Hold the Line. One excellent way for financial intermediaries, brokers and consultants to add value for their clients and to set themselves apart from the crowd is to be an adept price negotiator. Effective price negotiation adds hard dollars to the the top line, the value of which is obvious.
This article will explain one effective, but often counter-intuitive technique to maximize value in price negotiations, which is this: have the courage to resist the urge to compromise. To demonstrate, imagine a typical price negotiation in which you represent the buyer of a business. There is strong justification to support the value of the business at between $5,000,000 and $5,500,000. The property has been listed for $6,000,000 and the buyer has offered $4,800,000. Seller has countered with $5,800,000 and the buyer has recountered with $4,900,000. Obviously, having other potential buyers offering competitive bids makes the negotiations easier, so let’s assume there are none.
In this situation, many negotiators will almost by rote adopt a meet-in-the-middle strategy and urge a significant concession toward $5,000,000 in the next counteroffer. Often this strategy ends up leaving money on the table. Let me explain why.
Ineffective negotiators misperceive the subtle meanings conveyed through the bidding process. When the buyer offers $4,800,000 and further counters to $4,900,000, many assume that the buyer’s unspoken communication is “I believe the property is worth around $4,800,000, but nowhere near $5,500,000” or “I am unwilling or unable to pay anywhere near $5,500,000,000”. Although this may in fact be the case in some instances, generally a buyer has made a mental cost justification for the business at a certain price which may be well above his initial offer, before the buyer initiates the negotiations.
Thus, a more accurate way to interpret what is being communicated through the buyer’s bids is “I may be willing to pay more, but only after I have fully satisfied myself that the seller will not sell for less.” In other words, the buyer has an emotional hurdle to verify for himself that he is getting the best price. The buyer will not buy or even increase his bid until he has satisfied himself on this point.
How does the buyer satisfy himself that he is getting the best price? He tests the bottom by offering a price well below what he is willing to pay—often more than once. Michael Bosworth, in his book “Solution Selling”, uses the metaphor of wringing the washcloth. You cannot tell the washcloth is dry except by wringing it several times until water stops dripping out. Similarly, a buyer will try to “wring” the seller a few times to see if any price concessions drip out and will keep wringing until concessions are no longer forthcoming.
How does the seller stop the wringing? This obvious answer is: stop dripping. The seller must have the courage to hold the line on the price. This communicates to the buyer that he cannot acquire the property for less. Only when the buyer understands this will the buyer be more willing to move to the higher limits of what he is willing to pay.
Some may object that this approach is as likely to blow the deal for the seller as it is to earn him a better price. In reply I would offer a few comments and observations. First, obviously the price that the seller holds to must be within the range of reasonable. Generally, for every business there is a range of prices at which a deal can be made. This technique can be used to move the price more to the upper end of that range.
Second, parties to a negotiation often fear that any misstep in the negotiation process will cause the other party to terminate negotiations. My observation has been that the negotiation process is generally much more resilient than is generally appreciated, particularly if the negotiations are handled subtly and respectfully. If parties can trust in this resilience, they can be more free to respond in ways likely to produce better outcomes for themselves.
Larry DeVries is the managing principal of DeVries and Associates. He specializes in assisting small and middle market businesses in structuring, negotiating and documenting their important business transactions and relationships. If you have any questions or comments about this article, please feel free to contact the author by phone at (312) 948-8129 or by e-mail at ljdevries@devries-lawfirm.com. You can also visit the website of DeVries and Associations at www.devries-lawfirm.com.
