Negotiation basics: interests, options and a walk-away point
Before any negotiation, write down what each side needs and the ways a deal could be shaped. Also write the point where you walk away, set by your best alternative. Worked on a warehouse lease in Singapore.
Key takeaways
- Prepare three things before you negotiate. First, what each side really needs (their interests).
- Two common mistakes: Giving away your walk-away point ("we cannot go above 1.1") hands the other side the whole room for a deal.
- Interests: what each side needs underneath what it asks for. A landlord asking for a higher rent may care most about never having an empty building.
- Your best alternative: what you will actually do if there is no deal. Negotiation teachers call it the BATNA, the best alternative to a negotiated agreement.
- Walk-away point: the worst deal you would still accept. Anything worse is beaten by your alternative.
Key idea
Prepare three things before you negotiate. First, what each side really needs (their interests). Second, the different ways a deal could be shaped (the options). Third, your walk-away point, which comes from your best alternative if there is no deal.
Three words that do the work
- Interests: what each side needs underneath what it asks for. A landlord asking for a higher rent may care most about never having an empty building.
- Your best alternative: what you will actually do if there is no deal. Negotiation teachers call it the BATNA, the best alternative to a negotiated agreement. A strong alternative is the main source of bargaining power.
- Walk-away point: the worst deal you would still accept. Anything worse is beaten by your alternative. When your walk-away point and the other side's overlap, there is room for a deal.
These definitions follow the Program on Negotiation at Harvard Law School. It describes the best alternative as the course of action you would take if you do not reach agreement. It describes the room for a deal as the overlap between what both sides would accept. The economic logic is simple. Never accept a deal that is worse than what you can get elsewhere, and never refuse one that is better.
Worked case
A warehouse lease: finding the walk-away point
The prompt
A Singapore food distributor must renew its warehouse lease. The landlord asks SGD 1.2 million a year. Find its walk-away rent and the room for a deal.
The rent today is SGD 1 million a year on a three-year lease. The best alternative is another warehouse at SGD 0.95 million a year. Moving would cost SGD 0.3 million, plus about SGD 0.15 million of lost sales during two weeks of disruption. If the distributor leaves, the landlord expects the space to stand empty for six months. After that, it expects to rent it out at SGD 1.2 million a year. All figures are illustrative.
The structure
- What is the most we should pay, and the least the landlord should take?
- Our alternative: the other warehouse, with one-off costs spread over the lease
- The landlord's alternative: an empty building, then a new tenant
- Options that give each side what it values most
Working it through
1. One-off costs per year
Moving and disruption, spread over a three-year lease, in SGD millions.
One-off costs per year (SGD millions):(0.3 + 0.15) ÷ 3 = 0.152. Our walk-away rent
The other warehouse's rent plus the one-off costs per year: above this, moving is better.
Walk-away rent (SGD millions a year):0.95 + 0.15 = 1.13. The landlord's alternative
Over the same three years: six months empty, then two and a half years at SGD 1.2 million.
Landlord rent over three years without us (SGD millions):1.2 × 2.5 = 34. The landlord's walk-away rent
The same total, as a yearly rent from us.
Landlord walk-away rent (SGD millions a year):3 ÷ 3 = 15. Room for a deal
Between the landlord's minimum and our maximum.
Width of the room for a deal (SGD millions a year):1.1 - 1 = 0.1
The recommendation
Offer to renew at about SGD 1 million a year, and walk away above SGD 1.1 million. Above that, moving to the other warehouse is cheaper, even after SGD 0.45 million of moving and disruption costs. The landlord should accept anything above about SGD 1 million, because six empty months would cost it as much. To close the gap, offer what the landlord values most: a five-year lease instead of three, in return for the lower rent. The risk is that the landlord already has another tenant waiting. So check the local market before the first meeting.
Risks: The landlord may already have another tenant, which would raise its walk-away rent.
Next steps: Check asking rents and empty space nearby; Get a written quote for the other warehouse.
Before you negotiate, write down
- Your interests and theirs, as needs, not positions.
- Your best alternative, priced in money, and your walk-away point.
- Your best guess of their alternative and walk-away point.
- Three or four options that trade things the two sides value differently: length of contract, timing, volume, payment terms.
- Your opening offer, with a reason you can say out loud.
Giving away your walk-away point ("we cannot go above 1.1") hands the other side the whole room for a deal. And arguing only about price misses trades that make both sides better off. One example is a longer lease for a lower rent.
Your best alternative to a supplier deal costs USD 50 a unit, all costs included. The supplier offers USD 53. What should you do?
Sources for this lesson (2)
- Program on Negotiation at Harvard Law School, how to find the ZOPA in business negotiations
- Recognized public explanations of case-interview concepts and terms
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