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BATNA in a sales agreement negotiation

July 7, 2022

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This article is written by Khushi Goel studying BA LLB at Maharaja Agrasen Institute of Management Studies, IP University pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute resolution from Lawsikho. This article has been edited by Ojuswi (Associate, Lawsikho).

This article has been published by Sneha Mahawar.

Introduction

Negotiation is a method of resolving a problem between two or more parties in order to reach an agreement. The problem between them is that they have distinct requirements and goals, as well as diverging intentions. Therefore, in order to resolve such issues and to find out the best possible solution by the way of negotiation, this is acceptable to and beneficial for everyone. There are four key principles of negotiation that are reservation price, bargaining zone, and aspiration level and one of these principles the most important is BATNA. It’s a negotiation tool that lays out what to do if negotiations fail and no agreement can be reached between the parties. It can be a powerful negotiation tool if used appropriately, resulting in greater bargaining power The article will be focusing on the importance of BATNA in the sales agreement negotiation.

What is BATNA

BATNA stands for Best Alternative to a Negotiated Agreement. This was derived by William Ury and Roger Fisher in 1981 in their book called “Getting to Yes: Negotiating Agreement Without Giving In” BATNA is among the five principles of negotiation, it is a negotiation strategy that takes place before because it is an alternative to the prior negotiation and decides the reservation point. In simple words, BATNA helps the party stay on the safer side as it is advisable to never enter into serious negotiation without it. However, BATNA does not necessarily guarantee an agreement in your favour, but it prevents the agreement from going against your terms.

Like other forms of negotiation, BATNA also has its pros and cons.

Pros/ Advantages

Acts as a Plan B

It is a type of backup plan, if negotiation fails then it comes into the picture and saves the party’s interest and in case of failure of the previous one then it does not force the parties into a bad deal.

Increases negotiating power

More negotiating power means more things in your hand. This eventually adds confidence to the party.

A safe way

Best Alternative to a Negotiated Agreement explains the importance of analysing current and future situations which helps the parties to be on a safer side in a deal.

Cons/ Disadvantages

Complicated procedure

BATNA is a very long, complicated and expensive procedure. Therefore, it took time to find the best alternative way.

Miscalculations

Negotiators can miscalculate the cost or benefits of some alternatives which makes the process disadvantageous.

Risk

There is a high risk as negotiators predict the best alternative way and the future is uncertain. Additionally, another risk is attached to it which is the risk of making a disadvantageous choice.

Therefore, a strong BATNA can provide valuable leverage, a weak BATNA should never be revealed. But how to reduce the disadvantage factors and find your BATNA:
As discussed above this is a very long and complicated process. Therefore, there is a need to establish a step process to ease this procedure.

Procedure

Identify alternatives

The first and foremost step is the identification of alternatives that will assist parties to reach their goals in the long term.

Choose the best alternative

After the first step, which makes parties clear what can be the possible alternatives, now in this step select the best alternative that helps parties to meet their high priority objective.

Ameliorate BATNA, if possible

Look at the alternative and see if there is anything parties can do to improve it.
There are some of the deciding factors in narrowing down on your BATNA are:

Costs

The first factor is cost and it should address that. Do the long- and short-term costs of obtaining your optimal solution match up to how much it would be with your best alternative?

Feasibility and impact

The party need to pick a solution that is not only realistic but also one that can be implemented in minimal time.‍

Consequences

It is important to determine the consequences in such a way that the outcome of your optimal solution is better than the best alternative. If it is feasible for all parties involved, then maybe it is worth considering the alternative. Hence, it is a Pertinent factor that assures you to consider the consequences of your BATNA not just for the party itself but also for other stakeholders.

This is about BATNA with its advantages- disadvantages and their factors to decide your BATNA. Now, as per the topic what is a sales agreement and how they both are co-related. This will be discussed further in this article.

What is sales agreement

A sales agreement is a document which is legally binding on the contract between two parties and this clarifies the terms of a transaction for the purchase or sale of goods or services. The above two parties are; the first party is the buyer and the other is the seller. This agreement plays a crucial role in protecting either party from any type of future liability.

What is the nexus between BATNA and a sales agreement

Before any sales agreement, there is a deal which is nothing but a sales negotiation. In other words, it is a type of discussion between a buyer and a seller to make a sales deal. These negotiations allow sellers to resolve a buyer’s concerns about a purchase by reestablishing the value of the product or service and making compromises and from here the BATNA comes and makes the deal feasible for both parties.

Why is BATNA in the sales agreement

BATNA allows the parties to agree to an outcome which is mutually satisfactory that provides an edge to both the parties to deal on the safer side with strong backing. For instance, if one negotiation fails then the parties have another alternative that can satisfy both parties. Further, the other motives can be that it attempts to reconcile the interests underlying these positions, helps the parties to reach an agreement and circumvent the problems of hard and soft bargaining.

Role of seller

Sellers who actively manage sales negotiations to their BATNA—their Best Alternative to a Negotiated Agreement—and are aware of their leverage are more likely to achieve successful outcomes, and less likely to dramatically drop their prices, reduce margins, or agree to terms, not in their interest. One opportunity to increase your leverage in a negotiation is through the strategic use of information. Learn the buyer’s weaknesses, vulnerabilities, likes, dislikes, strategies, and aspirations.

Role of buyer

Buyer Identifies potential seller tactics and objections. It is imperative that they Don’t focus exclusively on their BATNA. Most don’t give enough thought or research to uncovering their counterparty’s BATNA.
Example:

Reeta needs a bicycle and is negotiating with John to purchase his bicycle. John offers his bicycle for sale to Reeta for Rs.15,000. Reeta finds a similar bicycle online to which the seller assigns a Rupee value of 12,000. Therefore, Reeta’s BATNA is Rs. 12,000 – if John does not offer a price lower than Rs. 12000, Reeta will consider his best alternative to a negotiated agreement. Reeta is willing to pay up to Rs 12000 for the bicycle but would ideally want to pay Rs. 10000 only. If John demands a price higher than Rs. 12000 Reeta will take her business elsewhere. Now, if John can sell his Bicycle to anyone else for 13,000, then 13000 is John’s BATNA. In such a scenario, an agreement will not be made, as john is only willing to sell for a minimum of Rs 13000, while Reeta is only willing to purchase at a maximum of Rs 12000.
If John’s best alternative to the deal is selling the bicycle to a dealership, which would offer him 12000, then both parties can come to an agreement because John’s reservation point would be 12000. In this case, there is a zone of potential agreement – Rs 12000 to Rs.13000. Somewhere within this range, the two parties should be able to come to an agreement on the sale of bicycles.
This example of sales of a bicycle emphasised that you can select the alternative that would provide the highest value to you and after determining your BATNA, calculate the lowest-valued deal that you’re willing to accept. Hence, The reason you negotiate is to produce something better than the results you can obtain without negotiating.

Conclusion

BATNA is the acronym for the best alternative to a negotiated agreement and is very helpful for the parties to agree. The vital role of BATNA is in dealing with the negotiation and implementation of negotiation. When there is no deal yet then BATNA always casts its shadow over deal negotiations. In order to have the best impact, it must be employed properly and deliberately. The method used in BATNA is frequently determined by a variety of aspects, including the facts, circumstances, the opposing party, and the negotiation’s aims, among others. Time and experience, as well as trial and error, are required to use the tool in the most effective manner. As a result, it’s critical to have a rough but well-thought-out plan in place before negotiating, taking into account all essential elements while also identifying your BATNA.

References

https://corporatefinanceinstitute.com/resources/knowledge/deals/what-is-batna/

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BATNA in a sales agreement negotiation

Introduction

What is BATNA