Fine-Tuning Your Contract

By — on / Business Negotiations

Adapted from “What About the Fine Print?” by Michael Wheeler (professor, Harvard Business School), first published in the Negotiation newsletter.

When negotiators sign on the dotted line, they sometimes worry about the wrong concerns. “Did I overpay?” wonders the buyer as he inks the sales agreement. Across the table, the seller is thinking, “I bet if I’d pushed a little harder, I would have gotten more.”

Yet it’s the words that surround the numbers that often are more important—and harder to get right. Take a simple real-estate deal. Isn’t it better to sell your condo for $400,000 than for $375,000? Not if the higher-priced deal is contingent on the purchaser’s sale of her current place. Likewise, the lowest price isn’t necessarily the best for the buyer if it doesn’t include exit provisions for a bad title or termites.

Sophisticated negotiators understand that a successful deal often hinges on hammering out the right contract language. In fact, choosing the wording is a negotiation in itself, one with its own unique pitfalls.

How do you measure success when you’re trading words, not numbers? The key is to remember that words are means to your goals, not ends. Take the noncompete clauses that employers often seek to prevent top talent from fleeing to the competition. Because most recruits don’t want to be handcuffed, hard bargaining can result. But securing noncompete language isn’t worthwhile if it’s unlikely to be enforced—and courts often disfavor such provisions.

College administrators learn this time and time again. For instance, in the summer of 2006, football coach Bobby Petrino signed a 10-year, $25 million contract extension with the University of Louisville—but took a better job six months later. Within days of his departure, Louisville found a successor by raiding the University of Tulsa; just before jumping ship, Tulsa’s coach, Steve Kragthorpe, had extended his contract through 2011.

Instead of battling over language that’s difficult or costly to enforce, look for other ways to achieve the same goal. To retain employees, for example, organizations can try one of two options: incentive clauses that vest benefits only after a certain number of years of service or “clawback” clauses that require repayment of signing bonuses in the event of early departure. A prospective employee facing such a proposal must weigh the present value of a future easy exit. The more attractive the job, the less important constraints may become.

Whenever you negotiate, be sure to calculate the tradeoff between tangible economic benefits and possible limits on your options—and ensure that compromises on one front are compensated by gains on another.

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.

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