In the souks of Egypt there is a saying, doubtless put about by the owners of carpet and antiquities stalls, that “a deal is only a good one when both sides come away happy.”
When negotiating an agreement with a Wall Street bank a couple of years ago, I floated this concept by them and they disagreed. Their attitude was that the proof of a good deal was when both sides came away unhappy. As the last few years have clearly demonstrated, Wall Street has been generous in distributing their misery as widely as possible.
But at least an Egyptian carpet salesman and a Wall Street banker can agree that the outcome of a deal is shared equally, whether it be a win-win or lose-lose. For some years, I have been peripherally involved with someone who only believes that in order for there to be a winner, the other side has to be loser. For him there is no such thing as a win/win. If the other side is happy with the agreement, it means he must have left something on the table, which his vanity won’t let him do.
Rather than viewing negotiations as an opportunity to make something work for everyone, he enters into it like a crazed rooster invading a new farmyard. Feathers flying, hackles raised, leaping up and down to impress the hens and trying to intimidate any other roosters.
Sometimes this works. If the other rooster is weak, or has no choice but to give up his hen harem because they won’t lay enough eggs, or knows that if he doesn’t give up he’ll be turned into coq au vin anyway, the “crazed rooster” approach can be successful. But more frequently, it merely starts any negotiations off in a hostile atmosphere that makes it all the harder to build the trust needed to complete the deal.
Most of my crazed-rooster acquaintance’s deals are never consummated. Of those that have come close, when terms and price have been agreed upon, a deep-seated insecurity comes over the rooster and he concludes that if the other side is willing to do the deal it means he didn’t squeeze enough out of them. He suspects they must despise him for giving in so easily. So before signing anything and getting it concluded, he goes back and says he wants to change the agreed terms before he’ll sign it.
Invariably it isn’t about the money, which is often negligible; it’s about getting one over on someone else. It’s about the rooster making himself feel bigger by making someone else look smaller.
And what of the rooster’s deals that do come to fruition? For a start, he almost always ends up paying far more than he needed to. A wise seller knows that a lot of hurdles need to be overcome to put a deal together, and someone who starts off with an overly aggressive attitude is going to drag the process out and generate a mountain of legal bills. Coming in and proclaiming what a big shot you are only makes the seller set the price accordingly. On those occasions the rooster has managed to get a deal done, when the seller has had no choice, the atmosphere has become so poisonous that breathing life back into the entity once it has been taken over is incredibly difficult, time consuming, and expensive.
Nobody begrudges a tough negotiator; most people with something worth buying have been tough negotiators themselves and realize that is the price of the sale. But though the crazed rooster gambit may occasionally work, many more deals would be done and much more money made if both sides came away happy.
Julian K. Hutton is president of Merlin Hospitality Management, where he oversees the company’s hotel management and distressed asset management operations, drawing on 20 years’ experience in the worldwide travel and hospitality industry. Reach him at firstname.lastname@example.org
It’s a common mistake that business owners make: waiting too long to address an expiring commercial real estate lease. Sometimes the time just gets away from them. In other situations, they might even think they can sign a quick renewal and be done with it. Whatever the reason, waiting until the last minute is a sure way to leave money on the table.
“I am often asked by business executives when they should start addressing their expiring leases,” says Robert Chavez, founder and CEO of Guardian Commercial Realty. “While the answer varies depending upon circumstances, the time to start due diligence is much sooner than most expect.”
Smart Business spoke to Chavez about how timing is everything when renewing a lease.
Why is it important to begin early when addressing expiring leases?
I like to use the analogy of buying a new car to illustrate the answer to this question. Suppose you were to walk into a dealership, ask how much the shiny new car in the showroom cost, and then wrote a check for it a few minutes later. You would likely pay a lot more for the same car than your neighbor who visited the dealership several times, asked questions about other automobiles in the same class and then finally arrives ready to purchase at the end of the month when the dealership needs to make its sales quota. By doing some research, making the sales person (and likely sales manager at this point) aware that he has done his homework along with being patient and strategic, the neighbor saves many thousands of dollars purchasing the same car.
On a much larger scale, leasing or purchasing office space is similar. Tenants that wait until their lease is near expiration send a dangerous signal as their landlord realizes they are essentially out of options. They do not have time to negotiate another lease and relocate. Landlords take full advantage of this knowledge and hold to a high rental rate with little or no concessions. They are aware that the tenant has painted itself into a corner. When they are facing an expensive ‘holdover’ tenancy or threat of eviction, the landlord is able to leverage tenants into a bad lease. Waiting too long can easily cost a 10,000-square-foot tenant upwards of $600,000 in lost opportunity over a five-year term.
When is the optimal time to focus on an expiring lease?
My rule of thumb is 18 months on average. Longer for very large leases, and somewhat shorter for smaller leases or building purchases. I find that it generally takes most tenants longer than they anticipate to truly focus on important or sensitive internal issues that will impact their real estate decisions. Multiple parties may be involved in such decisions, which always require additional time. Business circumstances may also change and it is important to have ample time to react. I like to have at least three months, at the outset, to feel comfortable that a client has really come to grips with its strategy and direction. Once a tenant finally does decide what it wants to do, it takes much longer to convince a landlord to agree to an appropriate transaction. Landlord also have their own agenda and timetable, so it is imperative that ample time is allocated for landlords that are difficult and/or slow to respond.
Is there ever a time when due diligence is not necessary?
Many tenants feel that because they want to remain in their existing space that there is no need to conduct extensive due diligence. That is a big mistake. Landlords and their own agents talk amongst each other to understand who is active in the market. They also ascertain important information from furniture vendors, architects and others in the real estate support factions regarding which tenants are in the market. If tenants in their building are not on the radar, then landlords are less concerned about losing them to a competitor and important negotiating leverage is lost.
How can tenants make sure they have a strategic advantage during negotiations?
Astute tenants will take time to interview several real estate brokers. It can be a big mistake to assume that the broker they used last time is still a good choice years later. Once selected, a good broker will assist with:
- Site selections
- Evaluating and interviewing architects
- Touring space
- Drafting and negotiating material business points in proposals and letters of intent
- Reviewing construction budgets
- Aggressively negotiating key sticking points to close a transaction in the tenant’s favor
- Assisting legal with document critiques
There is even more work to do once a lease or amendment is signed, but understand that all these steps take time to properly complete. Once completed, and the tenant is now fully informed with regard to its choices, cost and risk, it is surprising how many do elect to relocate based on the data. I have had many instances where a client has stated firmly at the outset of a transaction that they will not relocate, only to see them jubilant over an opportunity that far exceeds their initial expectations.
As is typically the case, hard work does pay dividends. Fortunately for tenants, they can hire a real estate broker early in the process to do the majority of the legwork. Their brokers can spot changing market conditions that their client may miss, or find a unique opportunity perfectly suited to the tenant before it hits the open market. The sooner you get started, the more time you give your broker to work on your behalf.
Robert Chavez is the founder and CEO of Guardian Commercial Realty. Reach him at Robert.Chavez@guardian.net or (310) 882-2060.
When there’s a lot on the line, companies expect executives to be expert negotiators and finesse a delicate compromise with board members or close a vital but tenuous deal with a strategic business partner. But sometimes things go awry even for veteran participants, as evidenced by the infamous botched merger talks between Yahoo! and Microsoft a few years ago, when Microsoft walked away from the deal after the Yahoo! CEO set the price too high.
Negotiators can be afflicted by a winner’s curse, overestimate their abilities, or fall prey to the common misconceptions and mistakes that can derail an entire session. Executives must constantly refresh and refine their negotiation skills to prevail, because when the stakes are this high, the opponents are formidable.
“We live in a society where everything’s negotiable,” says Dr. Asha Rao, professor of management for the College of Business and Economics at California State University, East Bay. “So if you don’t play the game well, you’ll lose.”
Smart Business spoke with Rao about the techniques that lead to successful negotiations and the common misconceptions and mistakes that may derail executives.
What are common misconceptions about the negotiation process?
We believe in fairness. In negotiations, professionals sometimes equate this with equality and assume that a good deal offers similar benefits to the participants, but it’s rare that both parties are equal coming into the session, and insisting on equality can shut down the talks without producing an agreement. One party may get a lot more out of it than another, but as long as each side achieves its primary goal, the gains don’t have to be equal.
Another common misconception centers on the notion that he who speaks first loses. If you’re prepared, why not make the opening offer? Doing so gives you the power to anchor the session and set the direction for the talks. And it provides a strategic advantage because it forces the other party to counter your proposal.
How can negotiators avoid typical mistakes?
These frequent errors will work against you, so avoid them at all costs.
- Failing to do your homework. You need to take a position that’s supported by facts, and failing to understand the issues before you enter a session can lead to misplaced confidence. Fastidiously research the issues before you begin, because great negotiators never wing it.
- Failing to identify interests behind positions. It’s easier to reconcile your differences if both parties realize why the other party wants something, and then focus on their common needs and interests. Rallying the participants around a common goal is a great way to break a stalemate and it keeps complex talks on track when the going gets tough. With common interests, negotiations can reopen as in the new successful deal between Yahoo! and Microsoft, where they integrate their businesses and build on common interests to challenge the market leader Google Inc.
- Succumbing to the winner’s curse. You may get what you ask for! Setting your aspirations too low may get you what you ask for but you end up overpaying or leaving money on the table.
What are the fatal flaws that derail experienced negotiators?
Don’t stand on false principle or let your ego get in the way, because negotiations aren’t about validating your self worth or advocating your beliefs. Your purpose is to get a good deal. Another grave error is adopting a take-it-or-leave-it position. Because it’s not an effective use of power, it sets the stage for confrontation, ends the discussions and forces the other party to walk away.
So what are the best practices and most effective techniques?
First, explain the reasons behind your position. Some experts maintain that this isn’t an appropriate technique, but the other party benefits when they understand your logic, and the information you provide may encourage collaborative problem-solving and fuel a compromise. Second, focus on multiple issues, not just one, because it allows the participants to set aside difficult problems, consummate small wins and build on their success. Third, always contemplate multiple scenarios in advance and prepare a series of fall-back positions. Develop your BATNA — best alternative to a negotiated agreement. A BATNA helps you build power, negotiate with confidence and recognize a good deal when you’re in the midst of an intense session.
Are there special techniques that help executives negotiate with a large group or board?
Identify your allies and the opposition. You definitely want to map the power and interests of each member, develop a strategy for approaching key players and focus your efforts appropriately. Plant your ideas and negotiate with individual members before the agenda is submitted to the forum, otherwise a group session can quickly deteriorate into an auction.
Dr. Asha Rao is a professor of management for the College of Business and Economics at California State University, East Bay. Reach her at (510) 885-4517 or Asha.Rao@csueastbay.edu.