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How to Profit from Negotiation Skills

Business owners have to negotiate on a daily basis when dealing with customers, suppliers, employees, investors, creditors, and government agencies. A new study shows that having a clear and defined approach to negotiation makes a massive bottom line difference. Negotiation expert Professor Barney Jordaan explains how.

Monique Verduyn

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Oil tycoon J Paul Getty, named the richest living American by Fortune magazine in 1957, took some sound advice from his father: “You must never try to make all the money that’s in a deal. Let the other fellow make some money too, because if you have a reputation for always making all the money, you won’t have many deals.”

It’s a point of view corroborated in a recent study by Huthwaite International and the International Association for Contract and Commercial Management (IACCM). The research has finally proved that having a clear and defined approach to negotiation makes a massive bottom line difference.

The study, titled Improving Corporate Negotiating Performance, explored how the world’s largest organisations (including Microsoft, BP, General Motors and TNT) are trying to improve their negotiating performance during tougher economic times.

It found that companies without any formal negotiation processes in place suffered an average net income decline of 63,3% between 2007 and 2008. In contrast, the companies in the top 25% of the Huthwaite/IACCM ‘negotiation maturity’ benchmarking scale recorded an average net income increase of 42,5% over the same period.

According to Professor Barney Jordaan, programme director of the negotiating skills course at the University of Cape Town Graduate School of Business, these results prove that planning, preparation and research are paramount to achieving negotiation success. It also proves that good negotiation skills can be the difference between success and failure in the business world, he says. We asked him to elaborate on why it pays to be cooperative rather than competitive.

How can good negotiation skills improve profits?

Most people think of negotiation as a contest. We are hardwired to approach it as a positional game. The mindset is, “I must win, and I will win at your expense, because for me to win you must lose.” That is how negotiation has traditionally been taught. It’s all about the money and you must get as much of it as you can.

The problem with that approach is that you are assuming that what is on the table is all there is to be had. If you are buying a property, for example, it’s standard to negotiate on price alone. As the buyer, you want to pay as little as possible, while the seller wants to make as much as they can.

I propose an approach that says, “Your gain is not my loss”. In this instance, price is only one issue and it has to be resolved jointly. How about putting more items onto the table to increase the value of the deal? The seller may agree to paint the entire building or make some alterations in order to seal the deal. This way, you get additional value, and they get the price they wanted. But you can only do that if you approach negotiation as a collaborative effort that actually increases the total value of the deal for both parties.

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Golden Negotiating Rules You Shouldn’t Miss

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What are the basics of good negotiation?

Business owners would do well to think more strategically about what they have to offer and what they expect to get before they even reach the negotiation table. Good negotiation begins with careful preparation and research. You also need to prepare the table (Who is going to be there? What do we do if we can’t agree?) and design the deal in such a way that it is really attractive to the other party as well as yourself.

What’s the best way to prepare beforehand?

The study proves that careful planning, preparation and research – and having a formalised approach – are paramount to achieving negotiation success. You must have an understanding of the underlying assumptions and needs to be satisfied on both sides. The first step is to do your homework.

This will entail research to uncover the other party’s motivations. In negotiating a property lease, for example, it may be useful to find out the cost to the landlord of keeping the building vacant. The next step is to assess your own needs and set objectives for the negotiation. It is important that the objectives remain relatively fluid, however, so as not to obstruct the process.

It may be helpful to ask questions to form a better understanding of the needs and interests of the other party. Phrase your questions tactfully and time them correctly to avoid antagonism. Gain information and uncover basic assumptions without immediately taking positions. It’s important to listen carefully to the responses. To gain greater insight, watch their facial expressions and body language.

Why is the collaborative approach so important?

Remember that relationships are critical to good business. If you negotiate in an oppositional manner, you risk destroying the relationships you have built. The other party may be tempted to get back at you, or to simply never work with you again. Engaging in a collaborative fashion, on the other hand, can really cement a relationship and create a true, valuable partnership.

The resulting agreement is more sustainable and takes less time and effort to manage, which saves costs. A large corporate that uses its muscle to bully the little guy into making unrealistic concessions will soon find that they have to put many more resources into managing the resulting contract – there will be problems with delivery and quality because the small business will no
longer be in a position to deliver and still make a margin.

There’s another link between negotiation and profitability. When two parties enter into a business relationship, it’s unlikely to be a once-off deal. Most business relationships are ongoing. To make the deal work in the best possible way, co-operation is required.

If you leave a supplier feeling like a victim or a loser, chances are that they will become aggressive. Because they feel that they’ve had a raw deal, they will cut corners and the deal may end up costing you more than you imagined. By choosing rather to add value to the deal on the table, you boost the relationship in both the short-term and the long-term.

Let’s say I’m an engine manufacturer who buys pistons from you. We develop a good relationship based on mutual respect, and over time we are able to collaborate on much bigger projects that require both sets of skills and products. We turn to each other when these opportunities arise because we have built trust, and so both of us benefit.

Successful negotiation is not about ‘winning at all costs’. In fact, coming up with mutually acceptable solutions that keep relationships in good order are more beneficial to businesses in the long run than deals where only one party gets its way. You can be tough, but leave something that will make the deal worthwhile.

How do you go about designing the best deal?

Designing an attractive deal, especially in highly competitive industries, often requires some creative thinking and stepping into the other party’s shoes. Let’s take the food market as an example. Imagine that a strawberry farmer is trying to sell his products to a large food retailer. There are many strawberry farmers in the market, so being successful will require designing a deal that offers more than just strawberries. It demands that the farmer understands what the retailer is looking for beyond just a good price.

For example, are they looking for organic produce, do they support sustainable farmers, do they promote ethical treatment of farm workers, or are they looking for local producers? Understanding what else is important to the retailer beyond cost and quality can provide crucial extra leverage when the two parties meet around the table. Do not let your deal rest upon one factor only. Look for creative ways to add some extra value. In competitive climates this can be the real deal-clincher.

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Thinking and Feeling. Exactly How Persuasive Are You?

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Which skills are key to good negotiation?

The collaborative approach is built on three main skills. The first skill lies in managing the agenda items. Because this is a rational, analytical process, it is generally quite easy to do, provided you have determined the context and boundaries of the negotiation upfront.

This is all about preparedness. The second is the ability to manage the process. Good behaviour is critical. Try to avoid anything that can make the process tense and adversarial. This requires you to view the process as a joint problem solving effort, even if you become aware that the other party may not be as keen as you are.

Your role is to convince them that by adding some value to the deal for you, they may well be able to add value for themselves. This is where the maximum benefit happens. Besides having a mutually appealing deal to offer, businesses must also pay attention to what happens during the negotiation – the way the process is executed is critical to value creation and sustainable relationships.

The third and closely related skill lies in managing the people aspect of negotiation. If only we could leave emotions out of the process, there would seldom be a stalemate. However, nothing is as emotional as money. It gives rise to fear, anxiety and mistrust. Managing emotions enables you to deal with how you are feeling in a situation without allowing this to interfere with rational thinking.

Ego, anger, and spitefulness are common during the negotiation process and they can lead to a level of irrationality that brings to mind the gambler who knows he is losing, but in his desperation, gambles more. Research shows that when we know we are going to get hurt, we want to make sure the other person suffers too. It’s the kind of response that says, “I know this is going to destroy me, but I’ll make sure it destroys you too.” It’s a common stance in high-profile divorce cases where, because compromise cannot be reached, the costs to both parties become astronomical.

How can a deadlock be resolved?

The ideal is to resolve the issue yourselves, so that you remain in control of the process and the outcome. If you do reach a stalemate, take a break, re-look your mandate, ensure you understand what is really motivating the other party. It may be worthwhile for both of you to brainstorm and then return to the table and see what additional value you may be prepared to offer. Don’t focus on only one solution; rather try to put forward a few different options. Sometimes it helps to bring in an additional party, someone from your team perhaps.

If you truly cannot see eye to eye on an issue, try to find possible benchmarks that are available in your industry. If you can agree on the benchmark, then you can return to the table and work out a proposal that is closest to that point of reference.

If all else fails, bring in a mediator that you both agree on. The mediator will take charge of the process and help you to reach an agreement. When talks get to this stage, the mediator is the one person to whom you can speak in absolute confidence, and who will have a full understanding of where both of you are coming from. A mediator will help you to generate various possible solutions. However, their role is to move negotiations beyond the deadlock, not to make decisions. If mediation fails, you may have to make the decision to give up and move on.

When should you walk away?

The ability to walk away is critical. The question of power – which often pits a small player against a larger, more dominant business – comes to the fore here. I always advise people to have an alternative solution in mind if the person with whom they are negotiating will not budge. You do not want to be in the onerous position of being forced to compromise because you have no alternative. If you are a small business, start spreading your risk and looking for alternative customers and options.

This will protect you from bullies, and is in the best interests of growing your business. On the other end of the scale, you also don’t want to be the person wielding the stick; threatening people into a solution is not the answer. Remember it’s about persuasion, not coercion.

What role does ethics play?

Behaving unethically damages relationships and can have serious legal consequences. Although it’s sometimes difficult to know exactly what is right and what is wrong, there are questions you can ask to keep you on the right path. How do you want to be remembered as a negotiator? Which will bring you more business – being ruthless or being ethical? Take the trusted friend test – would you do what you have just done to your best friend? Would you want someone else to do that to a loved one? Think about reciprocity and make your decision based on that.

The quick guide to negotiation

In their book Getting to Yes: Negotiating Agreement without Giving In, Roger Fisher and William Ury recommend conducting negotiations according to the process of “principled negotiation.” Their method has four main tenets:

  1. Separate the people from the problem. Both sides should attack a problem, rather than attacking each other. To achieve this goal, it is necessary to overcome emotional responses and set aside egos.
  2. Focus on interests rather than positions. The natural tendency in many negotiations is for both sides to state a position and then move toward middle ground. Fisher and Ury warn against confusing people’s stated positions with their underlying interests, and claim that positions often tend to obscure what people truly hope to gain through negotiation.
  3. Generate a variety of options before deciding what to do. The pressure involved in any type of negotiation tends to narrow people’s vision and inhibit their creativity, making it difficult to find optimal solutions to problems. Instead, Fisher and Ury suggest developing a wide range of possible solutions as part of the negotiating process. These possible solutions should attempt to advance shared interests and reconcile differences.
  4. Base the result on objective criteria. No one will be happy with the result of a negotiation if they feel that they have been taken advantage of. Find and apply some fair standard that guarantees a mutually beneficial result.

Tips from the boardroom

Play open cards

Douglas Reed
CEO, Vox Telecom

I like a simple informal chatty approach which we refer to as the ‘dumb farmer’ routine because this generally disarms people and makes them underestimate you. It is essential to be thoroughly prepared, have your objectives clearly prioritised and lay them out.  I don’t believe in holding your cards close to your chest. Rather get all parties to be open because this speeds up the process, encourages lateral solutions and makes it easier to construct a win-win deal. Visualise beforehand the outcome that you desire.  Be prepared to compromise on the small things, as that will make it easier to stand firm on the critical points. Remember, business is not personal; leave your ego at the door.

Know what’s non-negotiable

Benjamin Mophatlane
CEO, Business Connexion

I learnt two important lessons during Telkom’s bid for Business Connexion, a process which lasted two years and finally ended when the competition authorities blocked the deal.  Had it gone through, it would have been extremely beneficial for our shareholders, but not for our staff and customers. We knew this when we first entered negotiations and we were resolute about ensuring that any proposed deal would be in the best interests of our employees and our clients. Because we had determined that upfront, we were unwavering on that point. I also learnt that you must not allow negotiations to distract you from the business itself. In our case, the process went on for so long that we took our eye off the ball. It’s important to recognise when a potential deal is detrimental to the business and to let it go.

Retaining core values

Dawn Nathan-Jones
CEO, Europcar

The merger between Europcar and Imperial Car Rental was made easier because both companies were in the same group. At the outset, the challenge was the negotiation with Europcar International for the long term franchise rights in Southern Africa.  This was the most critical part of the integration of the two businesses. These negotiations took some time to finalise as Imperial Car Rental was already an established, well respected and reputable brand in South Africa with a significant share of the car rental market. The main areas of negotiations related to migration and retention of the Imperial Car Rental brand during the transitional period, as well as systems integration, franchise fees and customer service.  We had to ensure that we retained Imperial’s core values and areas of strength in the process.

Monique Verduyn is a freelance writer. She has more than 12 years’ experience in writing for the corporate, SME, IT and entertainment sectors, and has interviewed many of South Africa’s most prominent business leaders and thinkers. Find her on Google+.

How to Guides

When Do You Know It’s Time To Sell Your Business

Five telling signs.

Andrew Bahlmann

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Even though running your own business gives you many freedoms, everyone still has those days or even weeks of wondering, “Shall I stay or shall I go?” Sometimes this thought becomes persistent instead of a passing phase – and for your own financial future and that of your business, you need to be able to recognise signals that mean the right moment has come to consider selling your business.

This is never an easy decision, especially as the amount of stress and constant pressure that a business owner contends with will play havoc with the decision-making process.

Having engaged with hundreds of business owners over the years, we see the five most solid signals that prompt them to sell are:

1. Retirement

This is the single most common factor influencing the decision to sell a business. Whatever age you have chosen as your retirement goal, if you are approaching this then give yourself an opportunity to assess both the benefits and challenges of having your own business.

Have you considered an exit strategy, such as hiring someone else to run the business instead of you? Or, as in many cases, does your business represents your most valuable asset? In this case, it would need to be cashed out at some stage as this would represent your pension. Selling your business successfully and fetching maximum value could well be critical to ensure that your retirement is well supported by financial surplus.

Related: Selling Your Business To Your Business Partner

2. Lifestyle Change

Growing a business can be an infinite journey. Have you reached your goals with this business and do you have the appetite for the ‘next chapter’?  Or do you want to move off into a completely new business direction? Perhaps you would prefer to follow a passion of yours or spend extra time with your family, investing more time in yourself and them to counter the massive investment of time and energy that you have made over the years.

3. You are ‘gatvol’

We often underestimate what it takes to live life as an entrepreneur and the amount of compounded pressure we ‘on-board’ over the years. Whether it is customers, suppliers, staff or the banks, you know this stress has reached a decisive, even destructive level if you can’t shrug it off and instead you find yourself repeatedly saying, ‘Enough is enough!’

4. Building a business versus running a business

Go back to the beginning of when you started your business. Do you remember the passion, fire and motivation that drove you to achieving your first sale? How about that sense of achievement as you hit the subsequent milestones? All that represented the very DNA that you have as an entrepreneur – but as your business grew, so did everyone and everything you need manage on a daily basis. Do you find yourself being more of a human resources manager than that entrepreneur with that fire in your belly? Is running a business enough to motivate you and drive your core DNA?

Perhaps this is the signal for you to sell the larger business that you have developed to someone with the skills and interest in the administration it requires. Selling your business would free you up to apply your entrepreneurial skills in a new context.

Related: When Is The Right Time To Sell Your Business?

5. You can’t do it on your own

In many cases you may still have time and energy to keep growing your business – but you may recognise that you are not willing and able to do this yourself. Sometimes you would appreciate a ‘big brother’ who can share the load. This could equate to a partner injecting money into your business, taking on some of your risk or opening up new opportunities for you and your business. This has become more and more prevalent in South Africa with the BEE codes and pressure on certain industries. Bringing on the right strategic partner to help you navigate uncharted waters is a critical step to take in your eventual exit strategy.

Decoding the signals that suggest it might be time to sell all or part of your business means that you will make the right decisions to stay or go based on sound reasoning.  Remember that this is one of the few times in your life that you truly get ‘one shot’ to get it right.

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How to Guides

Selling Your Business? How To Exit In Style

Gary Palmer, CEO of Paragon Lending Solutions runs through some practical requirements to realise the best value possible when selling all, or part of your business.

Gary Palmer

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Preparing to sell a business you have put years of work into, or even built from scratch, can a be a daunting prospect. Aligning the disconnect between what you think it’s worth versus what a buyer is prepared to pay is just one of the challenges. 

Act like you’re on the market – all the time

Like the Scout’s motto says: Be Prepared. A business owner needs to make sure their business is sale-ready at all times. Not only will this save a heap of administration when you do want to sell, but also means that, should an excellent offer land on your desk, your business financials and compliance issues are well in hand.

Related: Looking to sell your business? What do I need to know?

A business must be able to show a clean set of audited financials as well as up-to-date management accounts. Your accountant will be able to help get these in order if they aren’t already.

Make sure you aren’t running personal expenses through your business. This can be a challenge for some small businesses. Despite the allure of minimising taxes by running private expenses through the company books, it poses significant risk when preparing clean financials.

Prepare a due diligence pack. This can be provided by your auditor or financier and will include a list of your current contracts, VAT and SARS clearance certificates and defendable cashflow projections. Having all the documents required for a due diligence in one place that is easily accessible will go a long way to cutting down on the time it will take your prospective buyer to assess the company’s value and future potential.

It’s also important to remember that assembling all the necessary documentation takes time. It’s better to begin the process well ahead of when it will be needed. It’s also quite possible that a potential buyer may put a premium on the buying price if they know they are walking into a business which is clean, up to date and has no unexpected auditing or compliance skeletons in the closet.

Consider all the angles

Business owners opt to sell their business, or part of their business, for any number of reasons. This could be in order to retire and live off the proceeds, or because they want to raise money for another business opportunity. It’s important for owners to remember that there are associated expenses and even delays that they should plan for.

Before any negotiation begins, a business owner will need to find the right buyer. There are a number of brokers and financial service companies who can help source qualified potential buyers and, unless you have an offer on the table, it is a good idea to work with a third party to get line up a few credible potential buyers.

Once the deal has been negotiated and you have settled on the price, you must factor in Capital Gains tax. It is sensible to have a good idea of this before negotiations begin and to work out your asking price accordingly. Other expenses may also impact what you walk away with, including professional fees for your lawyer, auditor and other consultants with whom you have worked during the sale. You should also plan for delays due to valuation debates and requests for supporting documentation which may take time.

Related: Selling Your Business To Your Business Partner

Finally, it is always a good idea to consider whether you want to walk away immediately after the sale. Many business owners choose to stay on in operations, and by doing so can negotiate a more favourable price with earn-outs attached to the sale price. After all, you are the person who knows the business best and has a relationship with your clients – and this insight comes with a value attached.

Most importantly, if you are planning to sell your business, it’s a good idea to have advisors and partners who have been through the process many times and are able to help you navigate what may be unchartered waters for the first-time seller.

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How to Guides

When Is The Right Time To Sell Your Business?

Of the 6 most common questions I get asked on a regular basis, when is the right time to sell is by far the most common. The mergers and acquisitions game is part art, part science and a whole lot of elbow grease.

Andrew Bahlmann

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Your personal context

  • How old are you?
  • How much energy do you have left in your tank?
  • Have you extracted value out of the business already?
  • Have you managed to de-risk yourself by investing in equivalent assets outside of your business?

Only you can answer these questions, but they will go a long way in providing clarity for you and your ability to take the first step to selling your business?

Is your business ready to sell?

If I had R100 for every time someone had said to me that they want to wait another twelve months before they sell, I would have accumulated a substantial amount of money. Despite what the majority of advisors say, there is very often no real need to ‘dress up’ your business for sale.

Related: Selling Your Business To Your Business Partner

Don’t get me wrong. You need a going concern that delivers solid returns to catch the eye of the right acquirer. However, who are you dressing your business up for?

If you do this properly, you will have more than one buyer at the table. Chances are, what is attractive to one buyer won’t necessarily be attractive to someone else. It is impossible to be all things to all acquirers.

You say you are just 12 months away….

12-months12 Months is a magical number. Business owners always seem to be 12 months away from being ready to sell their business. Maybe it’s that big contract you are hoping to land. Perhaps you want to put in a new IT system. There will always be something.

Speaking from experience, I had a client that was going to wait, but instead committed to the process. Had they waited 12 months they would have been hit with ‘Nene-gate’, Brexit and Trump all in a 12-month period! There is no way that anyone could have anticipated a trifecta like that. I had another client that put in a new SAP system in those 12 months and the acquirer used Oracle!

You will reach the 12 month point anyway…

With the time that it takes to complete a successful transaction there is a good chance that you will cross that threshold of that big contract that you were hoping to land, putting that succession plan in or whatever the reason was that you wanted to delay the process for.

Something else that generally ruffles a few feathers, is that selling the (proven) potential generally fetches a far greater value than the past. This in itself is a whole other topic, but in the context of when is the right time to go to market, always keep this factor front of mind.

Related: 4 Essential Steps To Take To Successfully Sell Your Business

What is happening in the economy and your industry?

We are fortunate to have seen an increased sentiment in, and around, the South African economy in 2018. There is an uptick in international interest, but you know what the reality is, it never really took a major dive. The reason being that irrespective of the economy or your industry, good businesses sell. Some of my best deals happened in 2016 when the economy was under severe pressure.

Remember that when times are tough, acquirers need to buy good businesses to grow, as their own profit and be under pressure. When the economy and your industry is doing well, acquires will buy as they have excess cash to invest and will have a more bullish outlook on taking risk in their investments.

Truth is….there is no perfect time

The one thing that I have learnt over the past few years is that one can theorise for months trying to think of endless ways to increase the value of your business. Without climbing into the market and actually determining what your reality is, you will keep delaying your decision to take your business to market.

There is only one real hurdle that needs to be overcome, and that is you. If it is any consolation you will never be 100% ready. What have you got to lose? If you go to market and, worst case scenario, you don’t sell, you still have a great business to run and grow.

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