How to Negotiate a Business Contract: Strategies and Tips

Contract negotiation is an essential process in reaching a business agreement. As they say in business, “You don’t get what you deserve; you get what you negotiate.” Before finalizing any business deal, it is crucial to sit down with the other parties involved and work out the details of the contract. Whether you are new to negotiation or need a refresher, understanding how contract negotiations work and implementing effective strategies is key.

How Contract Negotiations Work

In contract negotiation, each party must compromise on certain issues to achieve their desired outcome. Although there are numerous details to consider, most contract negotiations revolve around two fundamental factors: risks and revenues.

For example, let’s consider a commercial lease negotiation between a landlord, Vincent Allen, and a new business, Qualstarr, Inc. Vincent aims to secure profitable rental income (revenue) while ensuring the ability to promptly terminate the lease if Qualstarr fails to pay rent (risk). Since new businesses pose a higher risk due to their lack of an established customer base or revenue history, Vincent offers Qualstarr a higher rent price to offset this risk.

Stages of Contract Negotiation

Typically, contract negotiations consist of two distinct stages:

1. Negotiation of the basic business terms: This involves discussing what will be exchanged, when, and how. In the case of a commercial lease, Vincent and Qualstarr would negotiate the rent amount, lease term, security deposit, and lease start date.

2. Negotiation of the legal terms: This stage focuses on the contract’s boilerplate provisions. Parties negotiate matters such as contract termination, dispute resolution methods (mediation or arbitration), contract amendments, business insurance requirements, and the ability to assign or delegate obligations under the contract.

In our commercial lease example, after Vincent and Qualstarr agree on lease length and financial obligations, they need to address the finer legal details. Vincent might insist on Qualstarr obtaining business insurance, while Qualstarr negotiates for a sublease provision. Both parties might agree that an arbitration provision and written contract amendments are in their best interests.

The Parties’ Bargaining Positions

Each party entering a business agreement has something they want and something to offer (consideration). The bargaining styles and relative bargaining power of each party greatly influence the negotiation outcome.

Bargaining styles: The two common bargaining styles are adversarial (“I’m in charge”) and collaborative (“Together we will prosper”). Negotiating parties bring their temperaments, emotions, and personalities to the table alongside their terms. It is recommended to adopt the best negotiation style, which we will discuss further.

Bargaining power: The relative bargaining power between parties also plays a significant role. A party with superior bargaining power, such as a supplier controlling a high-demand, low-supply product, may present a “take it or leave it” contract. However, the less-advantaged party can argue against unfair or unconscionable provisions.

Contract Negotiation: 11 Strategies

Negotiating tactics vary, with countless books offering advice. Some tactics are silly or devious, potentially backfiring in negotiations. Here, we summarize 11 proven strategies for successful contract negotiation:

1. Break the negotiation into parts: Avoid an “all or nothing” approach by addressing the negotiation in sections, reaching agreements on each part separately. This approach allows for a series of solutions and a sense of progress.

2. The “I’m only asking for what’s fair” approach: Emphasize that your requests align with industry standards or current market prices. This strategy shifts the burden to the other party to convince you otherwise and make concessions.

3. The Getting to Yes approach: Look beyond the negotiating parties to identify the real interests or influences. Generate options based on objective and fair principles to foster a problem-solving environment.

4. Take control: Control the location, timing, topics, and pace of negotiation to create an advantage. Framing the issues gives the party more control over their resolution.

5. Prioritize, prioritize, prioritize: Identify your top priorities and rank the importance of other considerations. This helps maintain focus on what matters most and prevent getting distracted.

6. The “offer-concession” strategy: Leave room for acceptable concessions to make the other party feel they’ve achieved a good deal. Starting with your absolute bottom line limits flexibility.

7. Question rather than demand: Instead of demanding, ask why the other party takes a hard line on certain issues. Questions open up discussions while arguments shut them down.

8. Find points of agreement and end on a positive note: Acknowledge agreement on smaller points, creating a collaborative tone. Attempt to end each meeting positively, establishing a conducive atmosphere for progress and agreement.

9. Do your research: Having more information provides leverage in negotiations. Industry knowledge or personal connections can create a collaborative atmosphere.

10. Dealing with burnouts and ultimatums: Assess the underlying value of the deal and determine if it’s worth accepting ultimatums or enduring prolonged negotiations. Walking away can prompt the other party to reassess their approach.

11. Use facts, not feelings: Separate business matters from personal emotions. Present facts and rely on statements of fact rather than personal beliefs to maintain a professional negotiation environment.

Implementing these strategies will increase your chances of securing a final contract that meets your needs. Remember that a valid contract requires negotiation and agreement on all material elements.

Consulting a Business Lawyer

If you find yourself stuck on a particular issue or need help with contract details, consulting a business lawyer is advisable. Their expertise can minimize risks, maximize revenue, and ensure the contract’s legal correctness. While you may negotiate certain terms yourself, a business lawyer can guide you and place you in a better bargaining position.

For further education on contracts, we recommend reading “Contracts: The Essential Business Desk Reference” by Richard Stim (Nolo).

Disclaimer: This article is for informational purposes only and does not constitute legal advice. Please consult a qualified professional for legal assistance tailored to your specific situation.

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