How to negotiate – My Own Business Institute – Learn How To Start a Business

Determine market comparables
Before starting a negotiation, the buyer should determine what the actual closing prices were in recent comparable transactions. For example, in real estate the use of “comps” plays an important role in establishing benchmarks for how much is paid for houses. In an important transaction, such as selling your business (covered in another section of this course), a professional appraiser could also be used to establish the price along with other evaluation methods.

While “comps” establish overall pricing guidelines, sellers must then justify any additional benefits inherent in their product to justify a price above prices paid in other recent “comps”. Some other factors to consider in a purchase transaction can be found in Session 9 in the Start a Business course.

Pricing power
As an operating entrepreneur, one of your primary goals should be to build pricing power into your product or service. Pricing power is also a powerful tool in a negotiation. It can remove a product from the competition. For example, a toll road with no competitors has ultimate powerful pricing power because there are no alternatives to choose from. Coke© has built their pricing power and consumer preference through saturation advertising, marketing, and consistent quality over the decades. Your goal will be to build pricing power into whatever you are selling to help distance yourself from competition and justify your negotiating position.

In a buying transaction, you must consider the other side’s pricing power to establish how much you are willing to pay. For example, you may agree to pay $1.00 for a Hershey bar when competitor “Joe’s” chocolate bar is $.70, but you may not want to pay $2.00 for the Hershey against Joe’s $.80 bar.

A commodity, on the other hand, has no pricing power. The price is established by the market. In order to succeed in a negotiation involving a commodity, you will need to have the lowest cost in order to achieve any degree of pricing power. Examples of commodity businesses include agricultural commodities and airlines (even as airlines try to differentiate themselves to justify higher prices).

Determine the deal points for both sides
Both parties to a negotiation will have some issues that are “deal points.” A deal point is a non-negotiable condition and a transaction cannot be closed without including it. Most all transactions will have deal points and you need to determine what they will be on both sides of the negotiation. Here are some deal points between a landlord and a tenant:

The landlord’s deal points:

1. A cost-of-living adjustment to reflect inflation.
2. A net net net (triple net) lease where the tenants pay their share of taxes and other common area costs.

The tenant’s deal points:

1. A right to sub-lease the premises.
2. A kick-out clause in the event the anchor tenants vacate the center.

What special benefits will the other side derive?
The other side may be highly motivated to make a deal because of a special benefit to be gained from what you are selling. You need to determine if this is so. For example, your product may have special features which can be leveraged up to satisfy a huge market. Or you may possess a special real estate location, or a patent, or a market share which the buyer is willing to pay a premium for, above what might otherwise be considered the going market rate.

What is their reason to buy or sell?
It is useful to know if there are underlying reasons why a business is for sale. Is the seller in need of cash to make payroll? Does the buyer of your patented widget have ability and desire to scale it up? Does the seller of a business have pressing family problems?