01 Aug 2005  Research & Ideas

How to Choose the Best Deal

Weighing different options can seem as difficult as comparing apples and oranges. The first step is to find the equalizer—then proceed from there, writes HBS professor Michael Wheeler in this article from Negotiation.

 

Jim, a well-regarded residential developer operating outside Philadelphia, has been scouting around for a site for his next project. Two properties seem promising. The Abbott estate consists of seventy-five 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 one hundred 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.

You must figure out if going after one deal helps or hurts your odds in the other one.

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 fallback. If talks with one side go poorly, his BATNA is the uncertain 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.

1. Find the equalizer

To begin his analysis, Jim should look at each property independently, 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 alternative—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 feasibility

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?

Your investment in the deal you don't reach isn't wasted if you've gained leverage in the agreement you do make.

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 putting 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.

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 a 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 fallback. 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 micromarket. 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.

The test of success shouldn't be the best imaginable deal, but one that's good enough.

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.

Linked Negotiations

by Michael Wheeler

In this three-part series, I cover the basic types of linked negotiation, outlined below.

Category I: Juggling chickens and eggs. In "Which Comes First? How to Handle Linked Negotiations" (January 2005, Reprint # N0501D), I taught you how to handle deals that are contingent on each other. Buying a new facility for your expanding business may make sense only if you can get out of your current space at a reasonable cost, yet terminating your lease could leave you high and dry if you haven't secured a new location.

Category II: Pursuing birds in the bush. When you're shopping for a new car, the choice is rarely as simple as buying a specific vehicle or sticking with your old heap. Instead, you consider several makes and models, and perhaps negotiate for more than one. As this article describes, the final price depends partially on what you'd have to pay for something else.

Category III: Tipping dominoes. Sometimes success depends on orchestrating a whole series of negotiations. In the last article of this series, you'll learn to "tip dominoes," so that the consummation of one deal sets the table for the next one. For example, a real estate developer assembling an urban block for a new high-rise has to think strategically so that acquisition of one parcel positions him to snag the next.

About the author

Michael Wheeler is the Class of 1952 Professor of Management Practice at Harvard Business School. He is the coauthor, with Carrie Menkel-Meadow, of What's Fair: Ethics for Negotiators (Jossey-Bass, 2004).

Reproduced with permission from "Better or Best: Keeping Your Options Open," Negotiation, Vol. 8, No. 3, March 2005.

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