Negotiating Business Contracts: Effective Tips and Tricks

Contract negotiation is the exhaustive process by which two or more parties discuss the terms of a contract to reach an agreement authorized by the contractual parties. Contracts are a prevalent business transaction that specifies what each party is legally liable for in the business partnership.

May 30, 2022
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12:40 pm

Contract negotiations are used in a variety of transactions such as an agreement for employment, for real estate, for a business merger and or acquisition, or for an agreement between a company and an individual consumer. During the contract negotiation period, all parties will evaluate their responsibilities, the benefits the contract provides, and any anticipated risks to their party. Put simply, the goal of contract negotiation is to limit the negative and increase the positive outcomes of the contract.

Alas, some simple tips and tricks:

Understanding Contract Negotiation in Detail

Contract negotiation is the process of reaching an agreement on a collection of legally binding terms (in this case, between two companies). When two companies negotiate, both seek favorable terms while minimizing financial, legal, and operational risk. For example, when bargaining contracts with vendors, your company may advocate for the ability to pay monthly rather than yearly (or vice versa). In addition, payments, like many other issues, do not have a "correct" solution, but rather the option that is best for the contractual parties.

Challenges of Contract Negotiation

Contract negotiation is a vital component of contract management. Delays in contract creation or execution can slow a company down but are unlikely to impact the bottom line. Alternatively, a poorly handled contract negotiation can bind a business to onerous legal obligations for years. 

Routine negotiations, such as those over a software service agreement or SaaS agreement, focus on problems within the business relationship, customer data handling, information security, and cost, among a myriad of other things that might come up. In this case Company A might tell Company B, "We're willing to buy at this cost if you include our company's basic obligations around system uptime, otherwise you'll have to lower the price." 

The ensuing discussion can occur in real-time through diverse communication methods such as phone calls, in-person meetings, or email, but the key dynamics remain the same. Both sides make concessions by inserting, removing, or modifying contract clauses — the basic building block of contracts — until the two sides can reach an agreement.

While there are certainly best practices for contract negotiation, the sheer amount of coordination required during the procedure makes the process logistically challenging for all teams. Collecting contract negotiation feedback from multiple internal stakeholders as well as counterparties across multiple email threads or phone calls can be challenging.

3 Steps to Prepare for Contract Negotiation

Since each agreement is unique, your approach to planning the contract negotiation process should also be unique. Below are three essential steps in preparing for contract negotiation: 

  1. Define the contract's purpose

Whether it's to safeguard your intellectual property rights, to guarantee some annual recurring revenue, or to merge your company with another, every contract should have a specific goal. It's critical to understand why the contract is being drafted and what each party hopes to gain. The contract terms and the negotiated settlement will be both defined and driven by this purpose.

  1. Expect questions and concerns

Even as you focus on acquiring the best possible outcome for your company, it is important to stay mindful of any issues or queries that the other parties may have. This will assist you in building trust across the business partnership and will help the negotiation process go more smoothly.

  1. Be familiar with relevant legislation and types of liabilities

Based on the terms of your contract you may have to check federal, state, and municipal laws. Learning about the regulations that may apply to your agreement can help ensure your contact details are lawful. 

Contract laws define what cannot get included in a contract and the consequences if the contract is breached by either party. This is why it is important to consider any future costs or risks in the partnership so that you can account for them within the contract. Consider insurance, additional unexpected expenditures, and applicable government regulations during the contract.

Understanding the Contract Negotiation Strategy 

It is common practice to look at the agreement as a whole and begin negotiations from there, but if the contract is long and complicated, it may be best to begin by dividing it into sections. Though this strategy will result in multiple agreements, it will keep both parties motivated to continue. Motivation is important as it helps the parties to remain emotionally healthy and happy in their negotiations. Once each sectional agreement is completed they can be combined to form the formal contract. 

It is important to keep emotions and personal relationships out of the negotiations. If you focus on personal relationships during a negotiation you may agree to things in the agreement that goes counter to your goals to please them. When you focus on the facts of the negotiation you are more likely to argue in favor of your party’s goals to avoid problems later on.

Your priorities should be the first topic of negotiation to ensure you have the most crucial elements in the contract before the less vital elements. If you prioritize, it will be easier to compromise on the contract's minor details. If you're working with a business partner, it might be best to assign one of you to ask the challenging questions and make the significant demands.

Essential Contract Negotiation Tips

Every party, including yours, is entitled to take the time necessary to consider their contract preferences and consult with other interested parties about the agreement. Be patient with yourself and others as you work out the specifics of the contract. 

While negotiating can be challenging and time-consuming, be comfortable with taking your time and ensuring that everyone is satisfied with and understands the contract details. Here are some essential contract negotiation tips:

  • A term sheet is not a legally binding agreement, but it can serve as a good starting point for developing and negotiating your contract. The term sheet summarizes the general terms and conditions in a contract and can serve as a template for your contract later on. 
  • Contract lawyers are experts in precisely what you're going through. They'll be able to help you draft the contract, navigate the negotiation process, and ensure that the final agreement protects everyone's rights and liberties.
  • While communication is essential in any business relationship, it becomes more crucial when you are about to sign a contract. Since an agreement remains built on trust, you should remain open about any worries you may have. Don't be afraid to discuss anything you disagree with or ask questions about terms you don't understand.
  • When negotiating a deal, it's easy for emotions to take over, but try not to lose sight of your ultimate goal. As much as you have agreement goals, you should also know what would cause you to walk away from a contract. You should not feel obligated to sign a contract if it does not align with your objectives.

The Bottom Line

Contract negotiation plays a vital part in every organization and you must allow plenty of time for negotiation before, during, and after the agreements. It is better to complete any necessary research and documentation well before any meetings or negotiations take place. During the negotiation process, avoid making rash decisions and follow up on any queries or issues following the final agreement.

Using an intelligent contract negotiation platform such as Inkly can help you simplify your negotiation process and close your deals faster. Get started here to learn more about how our platform can help your business.