In most commercial transactions the parties will need to negotiate the terms before agreeing on the final details. Successful contract negotiation is not just about who has greater bargaining power – it is also about research, planning and following some well recognised guidelines.
Examples of these transactions include; shareholder agreements, partnerships dissolutions, commercial leases, the sale and purchase of a business, entering into a franchise business and the sale and purchase of land. The parties will obviously endeavour to obtain the best possible outcome for themselves.
Here are five tips to keep in mind when entering negotiations;
- Don’t be rushed into making a decision;
- Have a clear idea of the final outcome at the start of the negotiations;
- Take notes;
- Take the emotion out of it
- Any negotiations should be subject to formal agreement
Don’t be rushed into making a decision
There are a variety of reasons as to why a commercial transaction needs to be concluded without haste. In the proposed sale of a business the vendor may wish to exit the business quickly due to a health issue or because another business opportunity has been presented which requires immediate action. Similarly, the purchaser of a house and land may need to settle the purchase urgently because he/she is moving from interstate and wants to move into the new house before commencing new employment.
Whilst it does demonstrate good faith to try and accommodate the request to settle quickly it is imperative that the other party has everything in order before proceeding. One of the most important issues in any commercial transaction is finance. Finance needs to be approved and details of when it will be available known before committing to a contract. Bidders at an auction for a residential property need to be aware that;
- There is no cooling-off period in a contract for the sale of a property sold at auction;
- The contract cannot contain a term that the contact is “subject to finance”.
If bidding for a property at auction the bidders should ensure their financial institution has approved the loan and the amount of the loan will be sufficient to cover the sale price, stamp duty, registration fees, conveyancing fees and rates adjustments.
There is a substantial risk in bidding for a property at auction without having finance available or approved prior to the auction. Once the auction has concluded and the bidder has been successful, settlement will occur on the date specified in the contract. If the purchaser does not have the funds available to complete settlement the vendor can take legal action against the purchaser to enforce the contract.
In short, before you sign anything:
- make sure everything is in order; and
- if you have any doubts – get legal and/or accounting advice.
Have a clear idea of the final outcome at the start of the negotiations
It may seem obvious but all negotiations form part of the overall goal that the parties are trying to achieve. If buying a business the purchaser needs to consider what needs to be included as part of the business to ensure the business can operate efficiently. For example, a particular supply agreement may be essential to the operation of the business. If a continuation of that supply agreement cannot be guaranteed the purchaser may well be handing over a large sum of money for a business that cannot operate. See our article: “Business Purchase Checklist“. Always keep in mind that the negotiations over each item form part of the larger agreement.
Initial negotiations often commence in an informal setting, such as a coffee shop. It is prudent to record in writing any items discussed at that initial meeting. It is not uncommon for a dispute to arise over what was or wasn’t said in the early stages of negotiations. Where the negotiations get off to a rocky start it is often difficult to get them back on track and a final agreement never eventuates. As long as the other party is agreeable to notes of the discussion being taken, the notes will be a valuable tool in advancing the negotiations.
Similarly, there may be a level of distrust between the parties at the outset. In that case the notes will be very useful in determining the terms of the agreement. If the parties are at odds consideration should be given to instructing lawyers to negotiate terms with the other party or that party’s lawyer.
Take the emotion out of it
Following on from the previous tip negotiations are never successful when they are ruled by emotion. If the parties are at odds then it is far better to instruct a lawyer to conduct negotiations than to have the negotiations fail due to a personality clash.
There will often be situations where a vendor feels a strong emotional attachment to a business or property. Memories can’t be included in a contract, the cold reality is that a purchaser is not going to buy a house or business because it contains someone else’s memories.
The price being negotiated is often the subject of emotional debate. If a business has performed poorly over a number of years it is unlikely that the vendor will be able to sell it for the same price he/she paid for it. Understandably, it may be distressing for a vendor to know that all the hard work invested in a business over a number of years cannot be realised when it comes to selling it. On that point the vendor should be realistic when setting a price for the business having regard to recent economic returns. The purchaser should also conduct some background research to ascertain the market price for similar businesses.
Any negotiations should be subject to formal agreement
Purchasers and vendors often like to boast that a successful contract was negotiated and finalised over dinner and a handshake. This is rarely the case. Purchasers and vendors should take advice from their legal and financial advisers before committing to a contract. A term agreed by the parties could have unintended consequences if not corrected. For example, the price for a business could be agreed but the breakdown of the price may be subject to negotiation. The amounts specified for Goodwill, Plant and Equipment, and Stock-in-trade will result in differing capital gains tax consequences for the purchaser and vendor. It pays to obtain proper advice before committing to the breakdown of the price.
It is common practice to use a “Heads of Agreement” document to bind parties to a period of exclusive negotiation and to spell out confidentiality undertakings. The document can be restrictive in that it limits negotiation on key terms. My view is that the agreement between the parties should be confined to a single, final agreement.