Companies need contracts for a wide variety of reasons, from setting out the terms of a large inventory purchase to hiring new employees. While the details and wording of a contract should always be approved by a business lawyer before you sign anything, understanding the basics of contract negotiation can help you get the major pieces in place. Knowing how to effectively negotiate a business contract is critical to helping protect your company and ensuring your long-term success
The Contract Negotiation Process
Successful business deals start with a solid contract Define: Contract A legally enforceable agreement that, in the Western world, has four elements: the offer, acceptance and mutual assent; consideration; the capacity to agree and legality. that benefits both parties.
Negotiating a contract typically involves several steps. Circumstances might change from the time the initial offer is made to the point at which both parties finalize a signed document. The main steps of contract negotiation for a business deal include:
Preparing for Contract Negotiations
Before you can start the actual negotiations, you need to prepare your initial offer. Understanding business contract basics helps you figure out what things you might need to negotiate in a contract, so you should determine what things are in a standard contract before you start. Preparations for the actual start of contract negotiations involve:
- Researching the other party to learn their negotiating strategies and which aspects of the deal are most important to them
- Identifying your goals for the negotiations
- Determining which things in the contract you find essential and which are negotiable
- Identifying anything that might make you walk away from the deal
Making the Offer
The actual negotiations begin when one of the two parties makes an initial offer. Sometimes this comes in the form of a formal contract with all of the terms spelled out in detail. Companies often keep a set of standard contracts on hand for common situations such as vendor contracts, employment agreements, and real estate deals. You can use these to start the process if applicable. In other cases, the parties make a tentative verbal agreement first and move on to discussing the terms before a written contract is created. Larger business deals often work this way because the terms are more complex than a basic contract can encompass.
Discussing the Proposed Terms
Once the initial contract terms are proposed, the two parties usually discuss specific aspects to make sure everything is clear. There might be questions about dates, financial terms, penalties for breaking the contract and specific wording of sections in the contract. Clarifying all of this ensures that everyone knows what to expect from the deal.
Making Compromises
In most successful business deals, both parties have to compromise on at least some aspects of the contract. During the earlier preparation phase, you should have determined what things you are willing to compromise on, which makes it easier to stand your ground on the things that you deem necessary. Sometimes the compromise phase includes multiple discussions as each side makes suggestions or offers and the deal is worked out to everyone’s satisfaction.
Closing the Deal
Once the negotiations are complete, both sides sign the contract and close the deal. A contract is only finalized once both parties sign, so if only one side has signed, there is still room for negotiation. Sometimes one party may want to change the contract terms after everyone has signed, which can open a new set of negotiations. If no changes are agreed to, the initial signed contract remains in force.
Methods of Negotiating
Experienced negotiators have a wide range of tactics to get the other party to agree to their terms, and the specific negotiating strategies you use depend on both the deal you’re trying to close and the negotiating style of the other party.
Taking Control Over the Proceedings
If your party is the one to set the timeline for negotiations and write up the initial contract, you have more control over the process than the other party. Taking control over the practical aspects of the negotiation can be a subtle way to establish your authority and might make the other person more likely to agree to demands you make about the actual contract terms.
Building Negotiation Intensity
If you’re negotiating a complex business contract, starting off with the less important details is a way to ease the other party into agreeing on more involved parts of the deal. Once you’ve gotten the easy parts out of the way, everyone involved feels invested in the process and happy about how things are going, which makes it less likely that either party will pull out of the deal.
Focus on the Other Party’s Gains
If the person or group you’re negotiating with seems hesitant about agreeing to your demands, focus on what their side gains instead of what you want. By pointing out what you’re offering in exchange for a compromise, you can entice them to make concessions of their own.
Sticking with Standard Industry Terms
If your initial offer or compromise involves terms that are standard for your industry, point this out to the other party. This puts the burden on their side to justify why they are asking for an exception to standard procedure.
Leave Room for Concessions
When you make your offer, leave some wiggle room for concessions you might have to make. For example, if you want the contract completed on a certain date, set the date a few weeks earlier so you can push it out to the date you really want if the other party is hesitant. You still end up getting things done the way you actually want while the other side feels as though you’ve made a concession on your terms so they should concede something as well.
Know When to Walk Away
Taking a hard stance on a contract isn’t recommended because the other party might simply choose to walk away, but you should also know your particular limits. If there are things you absolutely cannot compromise on, establish those in advance so you know when you need to walk away from the contract. Conceding to things that are not really acceptable to you only leaves you unhappy with the deal later.
