Bad Negotiations Shouldn’t Sink Your Business Relationships

When business relationships flounder, a common result is lost value, time and resources. Such undesirable results are best avoided through strong relationships built with effective negotiating skills.

In the recently published “Entrepreneurial Negotiation,” authors Samuel Dinnar and Lawrence Susskind draw on their years of experience to highlight the critical importance of  effective communication and negotiation skills in the entrepreneurial setting.

Some general lessons of the book are applicable not only to entrepreneurs but to others as well.  Indeed, in today’s innovation economy, just about every business needs to bring an entrepreneurial mindset to creating disruption or risk being disrupted itself.  A business that waits to address issues only after a crisis erupts surely risks a loss of value, increased expense and reduced options for possible solutions.

Because opportunities and threats present themselves quickly, skilled negotiation is essential to minimizing harm while maximizing the chance for success.  This core message is nicely summarized in the book, which is briefly discussed below. Well documented agreements are the natural complement of effective negotiations—offering parties a framework for their relationship and a launching pad to discuss possible alternations that may be desirable in the future.

Entrepreneurial Negotiation

Last fall, the daily blog of the Program on Negotiation at Harvard Law School announced the publication of “Entrepreneurial Negotiation” in a post entitled “Most Startups Fail, But Yours Doesn’t Have To.” The post highlighted why entrepreneurs fumble key negotiations and, importantly, identified the opportunity to take steps to improve negotiation outcomes.

Those topics are explored in great length in the book, which starts with a hypothetical story of a company’s growth emphasizing key points of negotiation with various parties along the way.  After painting a scenario involving poor negotiation skills and an unhappy ending, the authors suggest how improved negotiation skills could have led to an improved alternative ending. The book then moves into a discussion of key components of the entrepreneurial world and common scenarios requiring entrepreneurs to negotiate.

The centerpiece of the book consists of stories shared by entrepreneurs who, in moments of brutal honesty, reflect on their real-life experiences and lessons learned.  These stories are supplemented by video interviews made available to readers in the website associated with the book.  In an article appearing in the October 2018 edition of Negotiation Journal entitled “In Practice:  The Eight Big Negotiation Mistakes that Entrepreneurs Make” the authors summarize the mistakes as:

Entrepreneurs Are Self-Centered

Entrepreneurs Are Overly Optimistic and Overconfident

Entrepreneurs Need to Win – Now

Entrepreneurs Are Too Quick to Compromise

Entrepreneurs Work Alone

Entrepreneurs Haggle

Entrepreneurs Rely Too Heavily on Their Intuition

Entrepreneurs Deny Their Emotions

Clearly, some entrepreneurs exhibiting behaviors described above have nevertheless created enormously successful companies. Less well known, however, are the many emerging companies that cratered and burned due to some dysfunctional relationship rooted in one (or more) of the factors. The United States Bankruptcy Courts are littered with the carcasses of such entities—with many others put down outside of court without so much as a formal bankruptcy burial.

Documentation Matters

A natural complement to effective negotiation is a well-crafted written agreement. Indeed, negotiations offer take place in the context of preparing documentation.  In addition, it is not unusual for parties to consider possible amendments to a deal against the backdrop of an existing agreement.

Mutually agreeable legal documentation should reflect the understandings, responsibilities and obligations of the parties. Unfortunately, documentation sometimes receives short shrift—with some parties opting to “paper” an understanding with a form from a prior deal or something found on the internet—if opting to put anything in writing at all.  Lawyers can be viewed as obstructionist and expensive (among other things). Unfortunately, some fall exactly into those undesirable categories.  For that reason, it is essential to establish an effective relationship with a business lawyer who understands the business objectives and can produce documentation that will actually be of benefit in framing and guiding a relationship.

Documentation should not be viewed as a burden, a hassle or distraction.  Rather, documentation helps parties define and set expectations.  Documentation is an opportunity to discuss various issues that may arise (given past experience with similar deals) and how the parties agree in advance to handle. In short, documentation is an opportunity for discussion of important issues, a means to allocate risk while building trust and removing uncertainty.

Any well negotiated understanding should be reflected in a well drafted document tailored to the situation at hand. The time to read documentation of course is before signing not after one side is citing provisions in a demand letter of some sort. In reviewing documentation, be mindful of the mistakes identified in the book—such as being too quick to concede, too vested in haggling, and too optimistic about the ability to meet obligations.

When business challenges arise, it can be tempting for a business to want to ignore contractual obligations or to cast dispersions on a counterparty insisting on compliance. Although possible for each side to retreat to corners and solidify arguments and positions, an approach that may be more mutually beneficial would explore negotiations around possible amendments or waivers to achieve common interests.

Expressions such as the following are a sure indication of trouble:

“The bank just needs to lend more money”

“The investor just needs to provide additional funding”

“The landlord needs to step back; cash flow is tight now”

“The buyer needs to complete diligence and get the deal done on our timeframe”

“The customer needs to close the deal now or the discount goes away”

“The vendor needs to ship now, on an expedited basis,  or we will never order again”

“The licensor needs to rescind its termination – we need those rights back”

In each instance, the statement indicates that another party “needs” to take some specific action to further the interest of the affected business. In reality, those other parties need not take any action including lending, funding, leasing, buying, shipping, licensing, etc. other than as specifically set forth in a contract.  If a party is to be persuaded to do more than legally obligated it will only be as the result of effective negotiation around common interests and not under a threat or demand.  Indeed, even a party that is legally obligated may refrain from performing—choosing to put a counterparty to the test of forcing a court challenge with its attendant delay and expense, which clearly would not reflect a well-functioning relationship.

Some variation of the above statements have been uttered by numerous cash-strapped companies.  Demanding actions from others while negotiating from a place of weakness is obviously ineffectual.   Companies that find themselves in this position sometimes begin to think of changing their posture by seeking to avoid contractual obligations or obtain some other upper hand benefit through a restructuring in chapter 11.  Yet, the administrative costs of commencing a court supervised restructuring  under current law can be exorbitant.  Further, a filing itself does not provide a solution beyond additional time and opportunity to have negotiations with key constituents about a solution.   Although there are situations for which chapter 11 is a perfect tool, it in no way compensates for a failure to effectively negotiate with others.   In short, there is no escaping the inevitability of negotiation.  Parties can escape the burden of delay, expense and uncertainty by confronting issues proactively and well before cash flow dries up and court relief begins to look desirable.

Conclusion

This article has emphasized the critical role of effective relationships with third parties constructed with solid negotiating skills.  Although Entrepreneurial Negotiation is focused on the importance of negotiating specifically in the entrepreneurial world, certain of the fundamental points apply more broadly as well.

Companies can and do fail for any number of reasons.  Failure based on ineffective relationships due to poor communications and ineffective negotiation is completely avoidable. Well documented agreements should follow naturally from effective negotiations and then serve as a framework for parties in maintaining and growing their relationship in a mutually satisfactory manner.

Read more: Negotiation Lessons: When CEO Meddling Degrades the Deal


John G. Loughnane

John G. Loughnane is a partner in Nutter’s Corporate and Transactions Department.

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