Adapted from “Dealing with Distrust? Negotiate the Process” by Deepak Malhotra, Associate Professor, Harvard Business School.
Kathy, a serial entrepreneur, was negotiating the acquisition of a boutique software-development firm when a dispute arose regarding the valuation of one of the software firm’s assets. Specifically, the firm owned the rights to a technology patent of uncertain value. The firm’s owner argued that this patent was worth millions. Kathy agreed that the patent had potential, but there was a problem. The technology potentially infringed on existing patents, and the holders of these patents would almost certainly challenge the firm’s patent in court. If the patent could withstand these legal challenges, it would indeed be worth millions. If not, it might be worthless.
How were things likely to turn out? The owner of the boutique firm was an undisputed authority on the issue and the best judge of the patent’s likelihood of survival. But because he was trying to sell his company, Kathy did not trust his assessment. Nor was she willing to stake millions on a third-party evaluator’s estimate (or “guess”) about such a complex issue. On the other hand, she was eager to consummate the deal.
Kathy came up with an interesting solution: she decided to purchase the software firm—but not the patent. She persuaded the firm’s owner that they should jointly reevaluate the patent’s value in one year’s time. By then, any legal challenges would be well under way, and—because the precise nature of the challenge would be specified—the patent’s true worth would be much easier to calculate.
The two sides also agreed to a pricing scheme for the patent given the potential outcomes of litigation, so that they could calculate a precise value after one year. And they agreed that Kathy could leverage a last-look provision if, one year from now, the owner wanted to shop the patent around; Kathy could then purchase the patent at any price offered to other potential buyers. Both sides were happy with the process they negotiated—and the deal that it allowed them to structure.
More generally, negotiators often stand to benefit if they delay negotiating an issue or outcome until they are better informed. Few things are as unnerving as a negotiation that drags on and on. As a result, negotiators often rush to reach an agreement as quickly as possible. Although there’s certainly virtue in not wasting time, there is also something to be said for holding off on agreement—if only on one key issue—until each side has all the information it needs to make a reasonable assessment.
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Related Article: Is It Really Worth That Much?