What Is Contract Negotiation?
Contract negotiation involves two or more parties discussing the terms of a contract to come to an agreement before signing and making it official. Contracts are a normal business transaction that includes details about what each party is legally responsible for in the business relationship. You may have an employment contract, one for a real estate transaction, for a business acquisition or merger, or between a business and a consumer.
During the contract negotiation process, all parties will assess their responsibilities, rewards they can expect from entering into the contract, and any risks they assume. The goal of contract negotiation is for all parties to feel comfortable with the details of the contract.
Steps to Prepare for Contract Negotiation
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Because every contract is different, your process of preparing for the negotiation process may be unique too. These general steps can help you feel more confident:
- Understand the goal of the contract. There is an underlying goal of every single contract. Whether that's to protect your intellectual property rights or to merge your company with another, it's important to know why the contract exists and what each party is hoping to get out of the agreement. The goal will drive the contract terms and the negotiation process.
- Prepare for questions and concerns. As much as you should negotiate a contract that you find favorable, it's also important to anticipate any questions or concerns that other parties may have. This will both earn you some trust in the business relationship, but also help the negotiation process go a little smoother and quicker.
- Look up applicable laws. Depending on your contract terms or if you're doing business with someone in another state, you may need to check federal and state laws, and maybe even municipal regulations. Becoming familiar with the laws that may apply to your contract can assist you with making sure you have everything covered.
- Become familiar with contract laws. Each state's contract laws vary too. These laws explain what cannot be included in a contract, as well as what one party may be able to do if the other party breaks the agreement.
- Assess risks. You want to think about any potential liabilities or what can happen in the partnership so you're ready to account for them in the contract. Think about insurance, additional costs if the unexpected happens, and any government regulations that could throw things off course.
Tips for Contract Negotiation
Whether you're new to contract negotiation or have been through your fair share, keep these tips in mind for a peaceful process:
- Be patient. Every party, including yourself, deserves to take the time they need to think over their contract interests and speak to other stakeholders about the agreement. Be patient with yourself and others as you figure out exactly what the contract terms should be. Negotiating can be an awkward and slow process, but it's important to take your time and make sure that everyone is happy with and understands the contract details.
- Begin with a term sheet. A term sheet is not a legally binding contract, but it can give you a good starting point when building and later negotiating your contract. A term sheet goes over the broad terms and conditions of an agreement and can be used as a template for your contract later on. If everyone can agree to what's outlined in the term sheet, then the contract negotiation process will probably be less stressful.
- Use a professional. Contract lawyers specialize in exactly what you're going through. They'll be able to assist you with drafting the contract, getting through the negotiation process, and making sure that the end contract protects everyone's rights and interests.
- Keep an open line of communication. Communication is important in any business relationship, but especially when there's soon to be a contract in place. An agreement is based on trust, so you'll want to ensure that you continue to be open about any concerns you may have. Don't hesitate to discuss anything you don't agree with or ask questions about terms you don't understand.
- Keep the contract goals in mind. It's easy for emotions to get involved when you're working on negotiating a contract, but try not to forget what your underlying objective is. As much as you have goals for the contract, you should also know what would make you walk away from a contract. You shouldn't feel you have to sign a contract if it doesn't align with your goals.
Negotiate Contract Strategies
In addition to basic tips and steps to prepare for the negotiation process, there are also strategies you may want to explore when you're in the middle of negotiations.
- Negotiate the contract in chunks. It's common to look at the contract as a whole and start negotiations from there, but when the contract is lengthy, it may be best to break it into parts. When you do this, you'll come to multiple agreements, which can keep both parties motivated to continue.
- Separate the people from the contract. It's great if you get along with the other party involved in your contract, but try to separate your feelings for them from the negotiation at hand. When you like the other people you're working with, you may agree to items in the contract that you don't really want to, all in an effort to make them happy. However, you shouldn't compromise on items that you are vehemently against because it will only cause issues later on.
- List out your priorities. Your priorities can guide the contract negotiation process, so make sure those are discussed first. You want to make sure you receive everything you need for the most important items before moving on to areas of the contract that are decidedly less important. If you know what your priorities are, it'll also be easier to compromise more on the least important parts of the contract.
- Use the "good cop, bad cop" method. If you have a business partner that you're working alongside, it may be best to have one of you serve as the one who asks the hard questions and makes the larger demands. It should be the one who feels most comfortable being in this position so that their approach is genuine but strong.
- Research the other party. The more you know about the other party, the more you can assume what their goals are and address their concerns before they bring them up. Personal details can also lead to a more collaborative environment as you discuss common hobbies or interests.
What Is an Enforceable Contract?
An enforceable contract is one that has been discussed between all involved parties, negotiated correctly, and has been signed by everyone named in the contract. Once this happens, all the contract terms become legally binding and each party must fulfill their part of the contract. An enforceable contract is just the beginning of a mutually beneficial partnership with a firm foundation.
Because of how significant contracts are, negotiating them is just as important. Going through the negotiation process will ensure that all parties are happy and that your business relationship can be full of trust and agreement.