By Michael Alerding, CPA We all exercise the art of negotiation many times each day. We negotiate with family about weekend activities or plans for dinner and even who gets to take the dog out for a walk. Negotiations are a natural part of our existence. We usually don’t realize we are negotiating, but whenever two or more people endeavor to reach a conclusion that will satisfy the entire group, that’s called negotiation. Conversely, if one person has the authority to make decisions for that group unilaterally, that is not negotiation – that is a command.
In the world of commercial lending, the ability to negotiate effectively is not just an important skill, it is mandatory in order to succeed, and the job is never done. After a lender successfully negotiates the terms of a loan package with a customer, the fun continues to the next level as the lender has to now negotiate with credit committees and managers inside the bank. No rest for the weary.
Pride in Negotiating
Over the past 46 years working with closely-held businesses, I have found that many owners/managers take great pride in their ability to negotiate. They look forward to “bargaining” with anyone – customers, employees, vendors, accountants and yes, even lenders. Lenders often deal with what may appear to be unsophisticated borrowers in terms of banking issues, but beware, they are sheep in wolves’ clothing. Most of my clients take great pride in striking a deal that gives them the upper hand, especially in times like these when the competition for loans is very high. Don’t let that “I am just a plain old bag-in-hand salesman” act fool you – most borrowers are excellent negotiators. The same negotiating skills that the owners/managers use in their day-to-day activities are those that the lender faces with an experienced and shrewd borrower. Most borrowers fancy themselves as “Super Negotiators” – and most of them are.
Negotiating is an artful process with a sprinkle of science. There are books, You Tube presentations, blogs and a plethora of resources that will aid in learning the basics of negotiations. Most break down the negotiating process into two primary types – “Distributive Negotiations” and “Integrative Negotiations”. They attempt to get the same result, but take a much different approach.
Distributive Negotiation focuses on positional or hard-bargaining, better known as a “haggling” model. Each side adopts an extreme position with the hope of “splitting the baby”. This methodology assumes, at its core, that there is a fixed amount of value (“fixed pie”) to be distributed and, accordingly, emphasizes the process of division without adding any value to the process. Many refer to this as the “Times Square” method. It is also often used in our legal system in an attempt to reach an equitable solution for both parties.
Conversely, the Integrative Negotiation emphasizes an interest-based or principled negotiation process that is designed to expand the pie by creating value in the process. The basic focus of Integrative Negotiation is in the underlying interests of both parties and not just one. This method ignores arbitrary starting positions and focuses on a shared interest in the problem rather than a personalized battle. Simply put, this process emphasizes adherence to principles to arrive at a mutually beneficial result.
The age old question as to whether negotiators are born or developed has been the subject of many decades of research. Research by both UC Berkley and Northwestern Universities indicate that negotiation skills can and often are a product of a person’s education, upbringing, culture and life experiences rather than simply an innate skill. Interestingly, the Berkley study found that many negotiators who thought they were excellent, born negotiators performed markedly worse than those who have learned the process.
Each negotiator has a unique style that represents the totality of his experiences. Some of the more notable negotiating styles include the following:
- Accommodating – enjoys solving others’ problems and preserving personal relationships.
- Avoiding – doesn’t like confrontation and will do everything possible to avoid and dodge confrontational aspects of negotiating.
- Collaborating – enjoys solving problems in creative ways – sometimes considered the “mad scientists” of the negotiating world. Often create chaos out of simple problems.
- Competing – really focuses on “winning” versus “solving”. Have strong instincts for negotiating and are usually very strategic and domineering. Often neglects the importance of relationships.
- Compromising – emphasis is on fairness for all parties. Can be useful if there is limited time to reach a decision, but often rushes the process in the interest of getting the deal done.
Each of us can see a few of many of these basic styles in our own approach and most don’t fit very nicely into one style. Understanding who we are and how comfortable we are with a certain style is critical to being effective.
Tips from the Trenches
All of this research is interesting, but the fact is that most of us learn to negotiate as part of our basic survival techniques – especially in a business environment. Bank loan officers get formal training in credit, business development and other critical technical areas, but most of their negotiating training comes from the trenches. Most learn early on that one of the most important lessons of negotiating is that if one party walks away a huge winner and one a huge loser, the deal is destined to fail. Although trite, the adage “win-win” is always the goal. Here are some tips learned by being on both sides of negotiating commercial loan arrangements for a client.
- Prepare, prepare, prepare – preparation is a form of leverage you can control.
- Listen louder – active listening confirms issues and avoids having to restate positions.
- Acknowledge and respect opposing views – even if you don’t agree, understanding is critical.
- Prioritize your positions – focus on elephants, be willing to concede rabbits.
- Remain positive – avoid using negative words and images.
- Watch your body language – can give away your priorities.
- Observe body language – note reactions from other side.
- Use open-ended questions – results in receiving maximum information.
- Beware of answering questions that have no right answer – “Have you stopped cheating at golf?”
- Avoid escalation – check emotions at the door, take a break if necessary.
- Be creative – solutions are not always what you expect – be prepared to innovate.
- Retain as many options as you can – don’t limit yourself unnecessarily.
- Be slow to concede positions
- Be prepared to walk away – perhaps the most important tip of all – if you absolutely must have a settlement, you are no longer negotiating.
This is reprinted with permission from BankNews Media and first appeared in Ag Banking magazine for first quarter 2017.
This post was written by:
Michael Alerding, CPA
Mike has over 40 years of experience in public accounting. He is a prior columnist for The Indianapolis Business Journal and serves on multiple boards throughout Indianapolis. He currently focuses his time on litigation support, business valuations, succession planning consulting and audit and accounting engagements.
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