Years ago, a potential client asked me to help him negotiate and sell some commercial real estate in Phoenix. After he agreed to my fee, I sent him my standard two-page consulting contract to review and sign.
Several days later, he suggested we just do this on a handshake. He said “written agreements make me nervous.” Interestingly, he was a former used car dealer!
How should I respond, especially as I thought the negotiation would be particularly interesting given that it involved a really sleazy counterpart?
Last week, my column highlighted two of my 10 Keys to Negotiating Contract Terms:
1) Keep your long-term goals front-and-center; and
2) Find out the parties’ underlying interests for each term or condition.
Here are two more, both discussed in the context of this consulting contract negotiation.
3) Put your leverage in your back pocket
I had strong leverage in my consulting deal with this property owner. I was very busy (making my level of need low), and I knew he really wanted me to help (making his need level high). Plus, he wasn’t speaking to any other negotiation consultants nor did he want to do it himself (so he had a bad Plan B).
But it would have been counterproductive for me to bring up my leverage in negotiating my standard contract’s terms and conditions (Ts and Cs). By doing so, I would have been signaling that I didn’t really want to work with him – and I did.
Downplaying or not addressing leverage in negotiating Ts and Cs is typical and usually preferable. Instead, parties often address leverage initially while negotiating the major deal points, like my fee, prior to negotiating the Ts and Cs.
This opening negotiation will also often result in a Letter of Intent or Term Sheet that includes a provision largely taking leverage off the table for the contract negotiation.
This might be an exclusivity provision ensuring neither party can talk to their alternatives/ Plan Bs. Or it might be a termination fee requiring a party walking away from the deal to pay the other party a big fee (thus making both parties’ Plan Bs pretty bad and substantially increasing the incentive to close the deal).
In really large deals, parties have even agreed to over $1 billion as a termination fee – a major incentive to get the Ts and Cs done to both parties’ satisfaction!
Of course, parties sometimes walk away from deals over Ts and Cs. But this largely occurs when circumstances change and/or a minor issue unexpectedly becomes a much bigger deal, making their Plan B a lot more appealing.
4) Emphasize “fair and reasonable” independent standards and benchmarks
So if leverage is basically taken off the table for the contract negotiation, what strategies should you use to accomplish your contract goals? Independent objective standards (my Third Golden Rule of Negotiation: Employ “Fair” Objective Criteria).
Here’s an effective standards-based response to my potential client when he suggested a handshake deal. In real life, I only used several of these (it would have been overkill to use more).
“A written agreement and these terms and conditions are fair and reasonable for both of us because:
· Any other consultant in the country is going to insist that you sign a very similar written agreement with the same provisions [market value standard];
· In our last deal we had a written agreement that you signed [precedent standard];
· Consultants in this area traditionally insist on written agreements with similar terms [tradition standard];
· As a lawyer and from a legal perspective, it helps both of us to put our obligations and responsibilities in writing as it eliminates potential ambiguities in our communications and protects you if I walk out of here and get hit by a bus and protects me if the same happens to you [expert standard]; and
· It would be costly and inefficient for you to hire a lawyer to negotiate with me over my standard terms [costs and efficiency standards].
One final note on standards. Precedent power is particularly compelling here. So scour the Internet and public databases and find and analyze your counterpart’s previous agreements.
If you can unearth similar deals where they have previously agreed to the provision or language you want, it can be golden. Psychologically, people hate to be inconsistent.
Latz’s Lesson: Standards and benchmarks rule in contract negotiations. Leverage – not so much.
* Marty Latz is the founder of Latz Negotiation, a national negotiation training and consulting company that helps individuals and organizations achieve better results with best practices based on the experts’ research. He can be reached at 480.951.3222 or Marty@LatzNegotiation.com.