Keeping Your Options Alive

By on / Daily, Negotiation Skills

Adapted from “Better or Best: Keeping Your Options Open,” by Michael Wheeler (professor, Harvard Business School), first published in the Negotiation newsletter.

Jim, a well-regarded residential developer operating outside Philadelphia, has been scouting around for a site for his next project. Two properties seem promising. The Abbott estate consists of 75 acres of woodlands and some overgrown fields. The executor of the estate is asking $1.65 million, though the price may be negotiable. The other site, a former apple orchard of about 100 acres, was acquired by a local bank through a foreclosure. The bank is preparing to list the property but has yet to set an asking price.

An optimist by nature, Jim believes he could make either deal work. But without knowing exactly what he’d need to pay for each, how can he determine which property is the better value? How can he judge success in his negotiations with one seller without knowing what the second seller might be willing to do?

Jim is facing linked negotiations, each of which presents special strategic and tactical challenges. According to basic negotiation theory, Jim’s BATNA—his best alternative to a negotiated agreement—should be his benchmark. He’s supposed to compare what he’s been offered at the bargaining table with the best he could get if he walked away. If negotiation would give him more, then that’s all upside. If not, there’s no reason to agree.

It’s a twist on the old “bird in the hand” adage. If you’ve already got a golden goose, your negotiating partner has to offer even better terms to get you to say yes. But if all you’re holding is a dead duck, you may have to take whatever your counterpart offers you.

Yet when negotiations are linked, BATNAs are rarely this cut-and-dried. Judging success with one seller is virtually impossible when you don’t know what the second seller might be willing to do. Jim doesn’t have a sure fallback. If talks with one side go poorly, his BATNA is the uncertain prospect of negotiating with the other side.

To begin his analysis, Jim should look at each property independently, as if the other didn’t exist. He needs to reckon the maximum he would pay for each—not his goal or expectation but the upper limit he could live with and still make his development project work financially.

Because the properties vary in acreage and have unique features, he’ll likely come up with two different numbers. It might make sense to pay more for the orchard parcel, for example, if he can put more units on it or if its better view would garner higher prices from homebuyers. Comparing the two sites, he might justify a maximum of $1.5 million for the Abbott estate and $1.8 million for the orchard property.

If Jim has taken both monetary issues and personal satisfaction into account, then the two deals should be equivalent at his stipulated upper limits. That’s because each figure is generated against the same no-deal alternative—this case, continuing to search for a viable site.

The next step is to double-check calculations by comparing the hypothetical deals. If Jim discovers that he’d subjectively prefer the orchard property, then he should tweak his upper limits—raising his maximum payment for the orchard, lowering what he’d pay for the Abbott estate—until he truly equalizes them. At this point, each should barely be feasible, and he should be indifferent between the two.

Finding the equalizer lets a negotiator compare apples and oranges. If Jim can shave $200,000 off the price of one parcel, he’ll have to get a comparable discount on the other. The equalizer thus serves as a rolling BATNA as the negotiations unfold.

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