“In every negotiation it must be assumed – unless you are dealing with juveniles – that your opposite numbers will always table maximum positions first.  Equally important, it must be assumed – unless you are dealing with fools – that your opposite numbers have not disclosed their minimum positions in any manner.” 

Thus spoke Gordon Wade Rule, author of “The Art of Negotiation” and the chief negotiator for procurement of the US Navy. Years later, Roger Fisher, William Ury and Bruce Patton from the Harvard Business School Program on Negotiation developed the concept of the BATNA – your “Best Alternative to a Negotiated Agreement.” [1]

• A BATNA is the alternative that lets you walk away from an unfavourable deal.

The BATNA is your alternative when you can’t get to your minimum position. You need to plan your BATNA carefully, because you will be walking away from the negotiations if you can’t better it even by the slightest margin.  Once you walk away, you may not be able to come back to the table.

The important thing to be aware of is that there are at least two BATNAs going on in any negotiation – yours and the other side’s.  Multiparty negotiations increase the number of BATNAs.  So not only do you have to develop your own BATNA, you have to figure out the other side’s as well.

Don’t make the mistake of thinking that the aim of the negotiation is to make a deal.  It usually isn’t.  The aim of the negotiation is to make a deal that is better than your BATNA.

Unless you have clearly identified your BATNA, you won’t know if the deal being put to you is good or whether you should walk away.  The key problem is that people overestimate their BATNA and don’t appreciate how much time and effort will go into pursuing it, or how much uncertainty there is about it ever coming off.  For example, in sale of business negotiations, business owners frequently turn down their first offer thinking that better offers will eventuate.  I always say, “based on what evidence?”  It is not the case that there is some immutable rule that your best offer will never be your first offer.  In fact, your BATNA might not even be price based, but simply be other methods of easing yourself out of the ownership position:

• Intergenerational transfer to children or younger relatives
• Initial Public Offering
• Merger with another company
• Hiring a management team
• Management buy  out
• Employee share ownership plan
• Sale of a minority interest
• Sale of a majority interest.

The problem is that unless you have quantified your BATNA, you will find it difficult to walk away from any negotiation.

How to Quantify Your BATNA

There are four steps in quantifying your BATNA before going into negotiations:

• List your alternatives.  Start with a free flowing whiteboard discussion, then start to narrow them down.  What will you really do if you don’t get a deal in the negotiation?
• Evaluate these alternatives.  Go through each alternative and critically evaluate each alternative, the cost of pursuing it and the actual likelihood of pulling it off.
• Isolate the highest value alternative.  This is the alternative you should pursue if negotiations fail.  This highest value alternative is your BATNA.
• Calculate the lowest value alternative you will accept.  Once you have isolated your BATNA, find the lowest value deal you would accept from the other side.  Now if they offer you less than that lowest value deal, you walk away.

Three Steps to Improving Your BATNA

If you have a strong BATNA, you are usually in a good negotiating position. You might even be in a position to disclose your BATNA to the other side. So what happens if your BATNA is weak?  Apart from not disclosing it to the other side, the answer is threefold:

• Try to improve it before you go into negotiations.  For example, if you are creating value prior to a capital raising or sale by improving your purchase price for materials, you might call your present supplier and seek 60 day terms instead of 30 day terms.  If the supplier agrees, then you can go into negotiations with the second supplier seeking 90 day terms, knowing you have at least 60 days up your sleeve.  You could even let the second supplier know what they are up against. The point here is to actually do something that improves your BATNA – not just engage in theoretical discussions.

• Isolate the other side’s BATNA.  Yours might be weak, but theirs might be worse.  Sometimes you only have to be slightly better than the opposition.  For example, with a few phone calls to your competitors, you might be able to find out what terms they were getting from supplier number two.  You will be surprised at what people will tell you over the phone.  If they are getting 90 days, and selling to them is the supplier’s BATNA, why shouldn’t you get 90 days?

• Weaken the other party’s BATNA.  For example, if supplier number two bought out supplier number one, then your BATNA of 60 days may well evaporate is supplier number two is now the only game in town.  Alternatively, if supplier number one and number two refuse to budge, you could let it be known that you are getting quotes for machinery that you will use to manufacture those parts yourself.  You don’t have to go ahead, but quotes and consultants’ reports on how this might be done might make them sit up and take notice when you push them across the table.

Conclusion

Going into a negotiation without a BATNA is like selling a business without having a valuation.  How on earth are you going to know when you are getting a good price and when you should walk away?

Take the time to go through the exercise properly and bear in mind that most people do not spend enough time examining the other options fully before deciding that they are, in fact, real options.

[1] Roger Fisher, William Ury and Bruce Patton, Getting to Yes: Negotiating Agreement Without Giving In (Penguin, 1991, second edition).