A sales contract defines a relationship between two parties. A lot of time and effort is spent in contract negotiation to draw up the perfect deal.
In this post, you’ll learn about the key stages of contract negotiation, strategies for running a smooth negotiation, and scenarios where it makes sense to negotiate your contracts.
Table of Contents
- What is contract negotiation?
- Contract Negotiation Examples
- Contract Negotiation Process
- Contact Negotiation Skills
- Contract Negotiation Strategies
- Contract Negotiation Tips
What is contract negotiation?
Contract negotiation is when you discuss the elements of a sales contract to reach an agreement on its contents that is beneficial to and representative of both parties involved.
Sales contracts are legally binding, so negotiation is often necessary to ensure everyone will get their needs met. It also ensures that new business relationships begin free of conflict, as both parties have worked together to discuss the terms ahead of time.
Contract negotiation is an essential step in the contract management process, and it usually takes place before a final contract is drawn and signed by both parties. For those looking to streamline this crucial step, LegalOn's AI contract review software provides an innovative approach to simplifying contract negotiations.
Contract Negotiation Examples
Here are some examples of situations that involve contract negotiation:
- Negotiating a real estate contract. Buyers sometimes negotiate costs with sellers, especially if they conduct inspections and find that they’ll need to spend money renovating the home.
- Negotiating pricing with a scaling customer. If customers have a long-standing relationship with a business and are looking to scale, they may negotiate terms and costs based on their history with your business.
- Negotiating the terms of a supply agreement with a third-party vendor. This can involve discussing payment options, like month-to-month versus annual, or the cost of product delivery.
- Negotiating the terms of an acquisition. If a company is looking to buy another, they may discuss the terms of the acquisition, like what happens to consumer data when the acquisition goes through and how much the deal's purchase price will be.
Contract Negotiation Process
There is no set time frame for negotiations. They last as long as it takes for businesses to agree. However, most negotiations follow the same process, which we’ll outline below.
1. Presentation of Sample Contract
The contract negotiation process always begins with sharing a baseline contract that outlines the most significant terms of the agreement.
This allows all parties to read through its specifications and identify areas that need to be addressed and negotiated during the meeting. Aim to provide a draft as soon as possible so everyone has enough time to read the draft and prepare ahead of time.
2. Discussion and Negotiation
During discussion and negotiation, you’ll do exactly that — negotiate the terms of the contract. Each party's needs will be discussed and added to the contract. There can be some back and forth to develop a solution that works for everyone.
3. Concessions
The negotiation process will always involve some concessions from either side. You may need to let certain things go for the other party to feel as though they are adequately represented in the contract, and vice versa.
You’ll likely go back and forth between discussion, negotiation, and concessions until you’ve reached a final agreement.
4. Finalization
Once both parties are satisfied, the contract will move on to the next stage: approval and signing.
Contract Negotiation Skills
If you want to negotiate the best possible deals for yourself, here are some important negotiation skills you should have:
1. Communication Skills
When you’re at the bargaining table, you’ll need to clearly communicate the deal you’re willing to accept and the boundaries you’ve set. If you don’t have effective communication skills, the person you’re negotiating with might not know exactly what you want, or they may cross boundaries and make you offers that won’t benefit you.
Even worse, the negotiation process may turn into a full-blown argument, which presents you in a bad light and yields no results.
Good communication skills allow you to have a civil discussion with other negotiators, articulate your thoughts, and actively listen to other people’s ideas. This way, there’ll be no conflict or misunderstanding, and everyone at the table can work toward a mutually beneficial solution.
2. Emotional Intelligence
Emotional intelligence refers to the ability to control your emotions and interpret other people’s feelings. Being aware of the emotional state of other negotiators can help you stay calm, pick up on what they’re implying, and focus on the matter at hand.
Emotional intelligence, however, can get in the way of reaching an agreeable deal if you’re not careful. For instance, you can become overly trusting at the bargaining table when you sense positive emotions within yourself and other negotiators.
On the flip side, you can get too excited to compensate for feelings of anxiety or nervousness.
3. Planning Skills
Having a clear idea of what you want to achieve and how the terms will be fulfilled is an important step in the negotiation process. This prevents you from skipping over some important or non-negotiable terms of your deal.
Before you sit at the bargaining table, consider the zone of possible agreement (ZOPA) between you and the other negotiators. ZOPA, or the bargaining zone, is the range in which you and other negotiating parties can make concessions.
You should also identify your best alternative to a negotiated agreement (BATNA). If neither party’s terms overlap, your BATNA is your next step. Knowing your alternative before the bargaining will ensure you’re not left empty-handed if the negotiation falls through.
4. Decision-Making Skills
To be successful during a negotiation, you need to be able to make decisions confidently. When the other negotiators make you an offer, you should be able to weigh the pros and cons so that you can agree, disagree, or make a counteroffer. If you’re not a good decision-maker, you may go back and forth with the other negotiating parties without coming to a compromise. This, in turn, may have negative effects on you or your company.
Contract Negotiation Strategies
Now that you know the necessary skills you need for contract negotiation, let’s go over the key strategies that will help you create a seamless discussion.
1. Know your needs and objectives.
Before beginning the negotiation, you need to know your key needs and objectives. These are your reasons for doing business with the other party. Having this information makes it easier for you to understand what you'll need in the contract.
For example, if you’re negotiating with a vendor that provides critical materials for your production line, strict delivery times that won’t interfere with your manufacturing process are crucial for you to include in the contract.
2. Ask questions.
Asking questions during contract negotiation is critical because it helps you understand where your prospect stands with the current state of the contract. You’ll get insight into their mindset, and the more you know about the reasoning behind their needs, the easier it will be for you to align your needs with theirs and vice versa.
3. Active listening.
When you ask questions, make sure that you also practice active listening. If they can barely get a word in, you’re taking control of the negotiation and not allowing the other party to express their needs. If you don’t listen fully, you may interpret something they say incorrectly and not see the motivation behind their needs.
4. Always communicate clearly.
Clear verbal and written communication is key to successful contract negotiation. You want to read the contract and not get bogged down in technical terms, and you want to speak through your thought processes so you’re clearly understood.
5. Don’t be oppositional.
You may feel the need to enter negotiations with your guard up. However, the goal of negotiation is for both parties to meet their needs, and you should strive to remember this.
Being oppositional can derail the negotiation. While you may need to remain firm on certain things, there is a difference between being firm and being hostile.
Contract Negotiation Tips
To succeed at negotiating, here are some tips you should always keep in mind:
1. Do your research.
Before you get to the bargaining table, you want to gather as much information as possible about the business you’ll be partnering with. The negotiating party with more information usually has more bargaining power and can propose favorable solutions without neglecting the other party’s needs and pain points.
2. Start with a contract draft.
One of the biggest mistakes that sales teams make is negotiating the terms of a business partnership before they are laid out in a contract. If you have nothing to negotiate with, you may go off-track during the negotiation process or even leave out some terms.
Instead, create a simple contract draft. It doesn’t have to be perfect but it should contain the major terms you’re willing to accept and have space for adjustments. This ensures that you touch on all the terms without wasting too much time deliberating.
3. Break the negotiation into parts.
Contract negotiations can be overwhelming, especially if the parties involved are large companies. That’s why you shouldn’t take the all-or-nothing approach by negotiating different terms all at once. This will only make both parties feel frustrated and confused as to the (lack of) progress made.
Instead, break the negotiation points into components and agree on each separately. So rather than expecting the other party to accept all your terms before you can move forward, ensure that each negotiation point has been addressed and resolved before tackling the next one. This is a better way to make progress.
4. Communicate your non-negotiables clearly.
Before negotiating a contract, establish the terms that you can’t compromise on. These are your non-negotiables. Once the negotiation process starts, clearly let the other parties know what these terms are. You have to be firm as you explain your non-negotiables to prevent the other parties from assuming that they are flexible.
Negotiation helps you establish a strong business partnership.
Negotiating a contract is a good thing. It ensures that both groups get what they want. If you approach the process positively and actively listen to what the other party is saying, you’ll find yourself with a sales contract that helps you establish a successful partnership.
