Adapted from “Hands Off! Negotiating Exclusivity,” by Guhan Subramanian (professor, Harvard Business School and Harvard Law School), first published in the Negotiation newsletter.
Ron McAfee, a carpenter and roofing expert, spent considerable time working with a condominium association on the design of a new roof deck. After gaining agreement on the proposed layout, design, and materials, McAfee submitted a written bid of $12,500. One of the board members subsequently showed McAfee’s plans to another roofer, who offered to do the job for $10,250. The condo association voted unanimously to go with the cheaper roofer, and McAfee was left with nothing to show for his time and effort.
As this story shows, a threat often lurks in the background of negotiations between a potential buyer and seller: one or both parties might decide to shop around for a better deal. How can you protect your deal against unwanted interference from a third party? In other words, how should you negotiate exclusivity?
Exclusivity is a fluid concept in negotiation, sometimes benefiting the buyer, sometimes the seller, and sometimes both buyer and seller. Typically, the party who has the less unique asset must worry more about a “deal jumper,” or third-party interloper. McAfee’s roofing services are replaceable, for instance, but the condo association has only one roof. Accordingly, McAfee should have negotiated some form of exclusivity at the outset of his work for the association. Negotiating for exclusivity can help ward off a deal jumper and, in many cases, can mark the difference between a deal and no deal.
The clearest method for achieving exclusivity is an exclusive negotiation period, during which both sides agree not to talk to third parties, even if approached unexpectedly by others. In some arenas, these terms are called no-talk periods.
An exclusive negotiation period can facilitate deals in several ways. First, it allows both sides to signal that they believe that a zone of possible agreement, or ZOPA, exists; otherwise, they wouldn’t waste their time by agreeing to negotiate exclusively. This signal can help build the trust that parties need to explore joint gains.
Second, an exclusive negotiation period worsens both sides’ best alternative to a negotiated agreement, or BATNA, since both parties are “locked out” from talking to others in the event of impasse. If neither party is making a significantly greater sacrifice of walk-away alternatives, then agreeing to an exclusive negotiation period should have little effect on relative bargaining power or the outcome of the deal.
Third, an exclusivity period sets a clear deadline for negotiations. As such, it forces one or both parties to put their best and final offer on the table before the exclusivity period runs out.
While these factors increase the likelihood of a deal, exclusive negotiating periods have their drawbacks. Exclusivity is quite valuable for the buyer with few options, but correspondingly costly to the seller who has many alternatives. As the seller in this instance, you should make sure you’ve fully exploited the benefits of nonexclusivity—negotiating with multiple parties and playing them off one another, for example—before committing to exclusive negotiations (to improve relationships your ability to claim and create in your next negotiation, read The Art and Science of Negotiation: How to Resolve Conflicts and Get the Best Out of Bargaining available from the PON Clearinghouse).
Discover step-by-step techniques for avoiding common business negotiation pitfalls when you download a copy of the FREE special report, Business Negotiation Strategies: How to Negotiate Better Business Deals, from the Program on Negotiation at Harvard Law School.
Related Article: Bargaining at a Fever Pitch: A Bold Bid