‘No’ is a powerful word in business negotiations. If used wisely, it can help you (or the other party) achieve the target objectives. If misused or misinterpreted, it can crater (or at least hamper) a deal for the wrong reasons. ‘No’ is such a problem in business negotiations that the seminal book on the topic is called Getting to Yes.

One of the most effective ways to use the word is what I call “early and often”. If there is a critical issue of fundamental importance, it is generally best to put that on the table right up front, so there is no misunderstanding later on. Think of “no personal guarantees”. If you don’t make that ‘no’ an unequivocal condition of the deal at the beginning, two things may happen: first, you will probably face even more friction in the deal when the issue arises later; and second, you will probably need to trade something extra of value in order to prevail on the issue. In this instance, there is no word better than ‘no’.

On the flip side, sometimes ‘no’ is blurted out during the heat of a negotiation, as a means of rejecting a request of the other side that you view as unreasonable. Here, the precipitous word choice can damage trust and create an impediment to a necessary compromise. It would be more effective to say, “I’m sorry, I can’t do it that way due to ________, but do you have any other ideas?” The actual word ‘no’ can have the effect of shutting down an option, while a euphemism meaning much the same thing can open new options and help bridge a gap.

Perhaps the riskiest of all ‘no’s’ is the one that comes up at the end of a deal, when the negotiations are nearly complete and a new issue arises. Both sides may be suffering from deal fatigue at that point, so it may not be as easy to problem-solve. Finally, you decide that you need to draw a line in the sand, and you are sincerely prepared to kill the deal if the other party does not accept your position. This type of ‘no’ brings the negotiation to the brink of collapse, often on an issue that could have been addressed in a more favorable and constructive manner earlier in the process. This type of ‘no’ can also damage the longer-term relationship, because issues do start to look more like ‘zero-sum’ issues that late in the deal. Importantly, in order to prevail on the point you have to effectively declare that the value of the entire potential relationship is less than the value of that one final point. For this reason, I rarely recommend brinksmanship of this type except when the issue truly does have such pivotal importance.

My final thought about the word ‘no’ is that it is often best to simply ignore it when said by others. We can’t control when or how our counterparties use the word, but we can control how we respond to it. Whether it comes up ‘early and often’, as a result of blurting out, or on a sticky issue at the end of the deal, I find it helpful to assume the other side meant to say “I’m sorry, I can’t do it that way, but do you have any other ideas”. If they really mean ‘no’, they can always shut their notebooks and walk out the door. As long as the other person is at the table, I assume that he wants to do the deal. And ‘no’ is just an invitation for me to help him find a way to do it.

It’s an axiom of business that “the whole is greater than the sum of the parts.” Through the magic of synergy, a company can often create value by combining two or more things (e.g., businesses, products, marketing ideas) that interact positively and result in more than a purely additive outcome.

The same result can often be seen in business valuation. For example, two companies, each with $10 million in revenue and $2 million in earnings, might become more valuable simply by combining into a single company with $20 million in revenue and $4 million in earnings. (While there are a number of factors that make this true, a discussion of them will have to wait for a future post about business valuation.)

However, I believe that the way people handle business negotiations often results in “negative synergy,” where the whole becomes less than the sum of the parts. The problem that arises is something akin to the volume discount. When I represent a client that is selling (or licensing) something, I believe it is critical to analyze the elements of value in silos. Then, the negotiation is about the fair price to be paid for each silo. If you only think of them as a bundle, the total price may look good on the surface, but could well result in leaving significant value on the table.

Consider a business owner trying to sell her business. If she focuses only on the value to be paid for the company as a whole, she might miss several elements of value that really should be discussed separately:

1. Executive Compensation: If the owner has employed herself in the business at a salary of $100,000, does that salary really reflect fair market value for the owner’s services going forward? If the owner plans to remain with the new company for an extended period, the value of her compensation should be specifically negotiated (with recognition of the fact that she would not then be an equity owner, except to the extent of any future option or stock grants).
2. Real Estate: If the business owns real estate that is not income-producing (and therefore not valued in a straight discounted cash flow or multiples analysis), that real estate may have appreciated significantly in value and the price to be paid for it in the sale can be negotiated separately.
3. Divisions: If the business has two divisions, one of which is mature and profitable with slow growth, and the other young and unprofitable but growing quickly, it may be a mistake to value those two divisions together.
4. Revenue Sources: Similarly, if the business (e.g., a software company) has three sources of revenue – software sales (high margin), hardware sales (low margin) and consulting, training or implementation services (medium margin) – it is important to consider the value of each source individually (recognizing, also, the fact that the three sources may be growing at different rates).
5. Territories: Sometimes, territories should be analyzed separately, too. For example, if you have a product that is selling high volume in the U.S. but low volume in another market (such as the U.K.), in a simple analysis the sale price may be based on the U.S. business while the U.K. business is essentially thrown in for free. If the buyer is not willing to pay fair market value for the U.K. market (and, indeed, the rest of the world), it may make sense to retain rights to those other markets for which you are not receiving value. (Note that a similar problem arises in territory-based licensing arrangements, if you grant exclusive rights to a licensee for a geographic area that is significantly larger than the area that the licensee can effectively cover in the near term.)

The benefit of thinking of all of the elements of value in silos is that you will then know, with clarity, the “sum of the parts.” Moreover, you will be able to discuss each element of value with the potential buyer, which may have both marketing and price advantages.

Admittedly, careful analysis of each element of value does not guarantee that you will be paid the full value for each as determined by your analysis – but it does help to ensure that, if you must give a “volume discount,” both you and the buyer will have a reasonable sense of both the existence and size of the discount. In addition, if you have specifically identified extra value for the buyer that is not fully reflected in the purchase price, this extra value may be used as negotiating leverage in other areas of interest (e.g., indemnification baskets and caps).

It’s usually easier to review a contract than to write one. It’s usually less expensive to review someone else’s draft. And it’s usually bad legal strategy to voluntarily agree to do so.

Once the basic terms of a legal agreement are decided, they are often given to the lawyers to “document” the deal. This is not a formality. This is one of the most critical steps in establishing the legal relationship. It’s so important, in fact, that customs have developed around who gets to “control the draft” (e.g., banks in loan financings, landlords in lease transactions, investors in first-round financings). Sometimes those customs can’t be altered. Other times, an unassuming offer to write the first draft is greeted with pleasure.

Here are five reasons to make sure your lawyer leads the drafting effort whenever possible:

1. Language affects negotiation. The words used in a draft contract may increase the probability that an important business provision is accepted or rejected. A particular borrower may react more favorably to a clause that says it “cannot borrow more than $100,000 without the lender’s consent”, than to one that says its “debt must always be less than $100,000”, yet (aside from the penny) these two clauses have virtually identical legal meaning.
2. Language affects future negotiation. Words that don’t have much practical meaning today might have an important impact on future negotiations. If someone’s consent is required to approve a matter, is the consent right modified by the words “reasonable” or “good faith” or “not to be unreasonably withheld” (sometimes adding “delayed” and/or “conditioned”)? In periods of good relations, the bottom line is that consent is required. If bad relations arise, the party who needs to receive the consent will be sunk if the clause does not contain at least one of the modifiers (and which one can sometimes become very important). These simple modifiers might mean the difference between writing the other party a large check in order to obtain consent, or having the right to receive that consent for free.
3. Language affects interpretation. While this heading is self-evident, it is not always understood that the drafter can greatly influence legal meaning with artful drafting. If you want to be sure that you are contracting only with a specific party, you might insert an “anti-assignment” clause. If you forget to preclude assignments “by operation of law”, in most states the other party will be free to merge with any other entity (irrespective of who ends up with control), and your anti-assignment clause will have no impact. Even further, if the other party is an entity (as opposed to an individual), that entity might have a total ownership change (due to the sale of its shares), and your anti-assignment clause won’t be violated.
4. Comments attract attention. By definition, specific comments on the other party’s draft get more attention than specific clauses in the initial draft. This is true for two reasons: first, sheer volume – you might have 10 or 20 or 50 comments, while the full contract might be 10 or 20 or 50 pages; and second, inference of motivation – the other party may suspect that, if you go to the trouble to make a comment, it must have special importance to you. Either way, the heightened attention may result in your losing a particular provision or having it watered down by modifiers that benefit the other side.
5. Negotiation psychology operates against the commenter. If you write a contract, you might consider 500 nuances among the many pages. If you’re the commenter and have 500 requested changes, you’ll be tagged a ‘pain in the neck’. The psychology of negotiations imposes a pressure on the commenter not to impede a deal with needless commenting. Moreover, time constraints may lead to actual or perceived pressure not to have more comments than can comfortably be dealt with in the available time. Finally, after the first one, two or three ‘turns’ of a document, the patience for new comments will all but disappear.

As alluded to at the beginning of this post, being responsible for the drafting will often be more costly, time-consuming and difficult for you and your lawyer. However, in my view the advantages described above almost always far outweigh the costs.

A conference speaker recently stated that a company’s legal documents should avoid vague provisions like “the parties will use their best efforts to….”

I agree that clarity is generally a virtue in legal contracts. Except when it isn’t. Practicing law, like many things, is part “science” and part “art”. One of the “arts” is knowing when a vague (or semi-vague) provision might help your client’s interests and, conversely, when clarity might hurt your client’s interests.

This assertion may offend classic principles of contract drafting. So, to be clear, I am not advocating that legal contracts should be full of carelessly vague statements. But there are at least two occasions on which I believe my client is better served by inclusion of a vague provision instead of a clear one:

• When, if the provision were made clear, the clarity would bind my client to do something that it is not positive it can fulfill — for example, rather than commit my client to selling X units/year in order to keep a contract, I might opt to have the client agree to “diligently pursue sales” (note, however, that if I’m representing the other side, I’ll push for clarity).
• When the parties are simply unable to agree upon a “clear” provision, but the deal can be made if they compromise on a vague one — my role is to help the parties get a deal done if they both want to do one; in fulfilling that role, I try to help the parties think about and clarify all ambiguity (where appropriate), but find a way to keep the deal moving forward even if they can’t clarify a particular provision at a particular time. In the formative stage of a joint venture, for example, the parties sometimes don’t know enough about each other or their prospective business relationship to resolve in detail how a particular issue will be handled.

Ask your lawyer to counsel you about the nuances of key issues under negotiation, including whether any particular issue should be made more clear or more vague. Don’t forget that, when it comes to contractual obligations, clarity can sometimes be a curse and vagueness a virtue.

Look for a future post on “controlling the draft”. It can be more expensive to have your lawyer be the primary draftsperson, but that gives him or her an important advantage in managing the nuances of a contract, including the degree of clarity inserted for each particular issue.