Dealmaking for entrepreneurs
Monday 14 November 2011
Deal-making and negotiation skills are critical for
entrepreneurs. Success depends not just on great ideas and marketing skills, but
also on a network of deals which all entrepreneurs have to put in place. These
include deals for funding, manufacturing, distribution, marketing and promotion,
and deals with employees. And let’s not forget the deal at the end of the cycle
– the exit deal – which is supposed to make all of that effort, and all of the
other deals worthwhile.
Negotiation in a changing world
Negotiation has never been more important in our lives. We live in a collaborative, interdependent world where everyone needs to make deals in order to get on. There are several reasons for this. The recession has sharpened the imperative to make deals successfully – we are all less vulnerable working together than working on our own. Equally, technology has internationalised trade, made business go faster, and converged different sectors. Both the opportunity and the threat this represents are best addressed by working in partnership with others. Social media has also changed the way we trade. In the old days companies could dictate the marketing of their products through top down PR and messaging. Now consumers are able to spot inauthentic messaging and tell other consumers if they are unhappy with the way a company behaves. For the sake of trading reputation, businesses have to negotiate with consumers for their attention, favour and money.
This new deal economy affects everybody: entrepreneurs, sole traders, SMEs, big corporate and governments. Yet negotiation skills are rarely taught, practised or even thought about. When businesses seek to improve their trading environment they focus on a lack of lending from banks, the legislative environment, or tax incentives. They focus on product development or cutting overheads. Nobody focuses on how much extra margin they could generate for their business if they improved the effectiveness of their negotiation skills by 10 per cent.
Over the course of my career as a dealmaker and negotiator, I have done many deals for and with large corporations, including Sony, Bertelsmann, Tesco and the BBC. However, I have also invested in and worked alongside many SMEs, and I now run my own business as a professional negotiator and trouble-shooter. I find that the deal-making tool kit required for success is essentially the same, whether I’m working with big companies or operating as an entrepreneur.
The three angles of negotiation
So what does this tool-kit consist of? Essentially it involves managing the three angles of negotiation – negotiating state of mind, negotiation process, and negotiation behaviour. As an entrepreneur, if you are able to successfully manage this “golden triangle” of negotiation, then you will be in great shape – and certainly in better shape than most of the negotiators you encounter on the other side.
Notice also that none of these three angles of negotiation has anything to do with the “content” of the deal. People get very preoccupied discussing issues like price, but these are secondary to the three angles of successful negotiation.
State of mind
The first of these angles, negotiation state, is all about the state of mind you bring to the negotiation, which ideally is to be relaxed and confident. Think of yourself as a top sportsman going out to play a match. If you’re anxious, people will spot this (subconsciously or otherwise) and seek to push you harder. It’s also important that the other side is in a constructive state of mind too. If they’re feeling angry, worried or overwhelmed, that will only make the deal harder to do. One of the key issues in forming the right attitude is to have a true appreciation of the bargaining power on both sides.
It’s very easy to underestimate the number of aces you have on your side and overestimate the number of aces held by your negotiating opponent. However, it’s normally the case that the bargaining power is more evenly divided than most people appreciate. This is a particularly important issue for entrepreneurs, who often find themselves negotiating with opponents larger in size. You may not have market size but you might have niche marketing power which gives you an edge with a larger player. You may have information, expertise or network power at your disposal. There are nine different sources of bargaining power, and they are rarely arranged 9-0 in favour of anybody.
There are normally seven stages in any negotiation and if you miss a stage you’re doomed to go back and cover the missed step. Everyone is familiar with the later stages, including bidding, bargaining and closing the deal, but people often skip the earlier stages because they are impatient to get to the haggle. This is a problem. The first stage, preparation, is absolutely key. You need to know who is on the other side, who will be on your side, what’s the history between you, what’s your ideal position, what’s your bottom line – a whole host of issues which are too important to leave until the heat of battle.
Entrepreneurs can create an advantage for themselves here. Larger deal partners may be ill-prepared. A further early stage is the exploration of the emotional needs on both sides and seeking coinage, which can address those needs. All negotiations are ultimately driven by the emotional needs of the participants. Do they need reassurance, respect, a sense of belonging, a desire to achieve?
You need to be able to work that out. Once you have you can deploy coinage to meet those needs, and get back what you need in return. Coinage is a concession that feels like loose change to the giver, but has high value to the other side because it meets an emotional need. Finding coinage requires creativity and imagination – these are exactly the kind of skills which entrepreneurs should have in abundance.
The management of negotiation behaviour is key. There are 12 different kinds of negotiation behaviour clustered around four types. Push behaviour is all about what I want from the deal and pull behaviour is focused on what the other side wants from the deal. Join behaviour is about what we can achieve from the deal together and part behaviour is about taking your energy out of the deal – e.g. through taking a break from the negotiation.
Different behaviour suits different stages, situations and people. This is important as most people normally default to their favourite behaviour every time. This is not enough. There are many different types of individual – some are optimists, others are born pessimists. Some like to move towards solutions, others like to avoid solutions. You have to select the right behaviour for the right person. How can you spot these different behavioural types? Through asking questions, observing and listening. These are not always natural skills for entrepreneurs. They are often so passionate about their project that they spend far too much time talking. As a rule of thumb you should not spend more than 30 per cent of your time talking in any deal. More than that and you have no time to focus on the other side and how they’re behaving. So entrepreneurs should learn to exercise verbal restraint when negotiating – generally, the more you say the more you give away, the less you say the more you understand...
Clive Rich is the UK’s leading deal-maker and trouble-shooter. For more information, visit www.cliverich.com
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