The Art of Negotiation – Price v Value

It’s amazing how many people tell me that they don’t like negotiating when, in practice, they do it all the time. They negotiate with their parents for extra pocket money or to stay out late, they negotiate with their boss for extra leave or a pay rise, and they negotiate with landlords over their rent or with buyers when selling their house. Everyone negotiates something every day and it’s no different when dealing with Asian investors, entrepreneurs and clients, but you may have to step it up a notch.

You only have to visit a wet market in Shanghai, a silk market in Old Delhi or the property market in Sydney to realise that, whether they paid over or under the odds, negotiating a great outcome is a popular pastime. And everyone loves a bargain.

Sit around a table at any Chinese family dinner or gathering and you’ll find that the conversation will quickly move on to what things cost, why you should negotiate a better deal and, most importantly, how someone managed to secure an amazing bargain! You can see the pleasure that comes from stories of negotiating amazing deals from hapless vendors. And the determination by others to trump them with an even more outrageous story of daylight robbery! As I once discovered on a trip to the south island in New Zealand, western people do the same with stories about catching fish!

As a result, its a common perception that when setting a price for a Chinese buyer, it’s prudent to start high to give yourself room to move lower so as to allow the inevitable negotiation to take place. In any transaction there needs to be a win-win, so allowing the Chinese buyer to negotiate a lower price gives them “face” and allows them to believe that they got a good deal themselves, whilst the vendor walks away with a fair price. Everyone feels good!

In my view, this is all highly simplistic and, to some extent, trivialises a highly specialised area of cross-cultural complexity – the art of negotiation

SETTING THE PRICE

Quite apart from setting the price high to allow room for negotiation, there is a tendency for western vendors to overvalue their assets, particularly when the potential buyer or investor has an Asian face or name! We come across this all the time. It’s ironic that, even though its a common perception that wealthy Asian buyers will always look for a bargain, the reality is that vendors often think they’re stupid and will pay over the odds. Of course, there are many examples of Chinese investors paying far too much to secure ‘trophy assets’ (eg vineyards, boats, private jets) and alluring land or real estate deals, where the buyer appears to have allowed his or her emotions to take over, or paid too much attention to the sweet talk or commission-driven motives of agents or advisers. But, from my experience, in the majority of cases, Chinese investors are quite savvy when it comes to valuing assets and, whatever their motivations, are likely to do their due diligence and negotiate hard.

As a result, the setting of the initial price is more critical to the outcome than is generally thought. It’s important to consider:

(a) your absolute bottom line i.e. the price below which you would be willing to walk away and refuse any further negotiations. From my experience, this number is often too flexible based on what happens during the negotiating process. We had one client who dropped the price by $10 million every week if they didn’t hear back from the interested investor!

(b) the price you hope to achieve i.e. a fair price based on reasonable parameters which can be supported by an independent professional valuation (in the case of a piece of land or a building) or a reasonable (eg 4x) multiple of earnings (in the case of a business) and can be supported by examples of similar transactions in the same location, industry or sector. From my experience, expectations around this price are often too high (in some cases, far too high!) and vendors would be better to put themselves in the shoes of the buyer rather than thinking only about what they hope to achieve from the sale.

(c) the price you go to market with i.e. a price which may be a bit higher (eg 10% higher) than the one in (b) above to allow some room for manoeuvre and to give you the best chance of achieving a win-win for both sides. From my experience, if you start with an absurdly high price, the potential investors may simply walk away and think you’re treating them like idiots or you’re not serious about selling. If this happens, it will be very hard to get them interested again even if you drop the price to a more sensible level, because the damage has already been done.

At the end of the day, all things being equal, an asset is only worth the amount that someone will pay for it (ie the price). The negotiation is just the fun part while everyone plays the game and sees what they can get away with. In a hot market, this usually works in favour of the vendor. When the market is slow, then the buyer holds all the cards. A deal gets done when both sides feel they have won. That’s how a market works. It simply matches buyers with sellers. The rest is just a negotiation about the price.

In my view, if you do things properly, it can be completely different when you’re working with the Chinese and negotiate on the value, rather than just the price. As I’ve said many times before your success will come from focusing on the relationship rather than the transaction.

When you develop, build and nurture strong and lasting relationships with friends and business partners, normal commercial considerations go out of the window. A business relationship becomes a personal relationship, families get involved, children and loved ones come into the equation and the trust is unbreakable.

Imagine selling a car you own to one of your children? Would you focus on the price, and push it as high as you can, or would you want to make sure that they got maximum value for whatever you asked them to pay?

This is how the Chinese do business and buy and sell from each other, as if they’re all in the same family, the same circle of trust and a place where nobody can escape from doing the wrong thing. Business has been done this way for centuries and, despite China’s modernisation, it’s basically done the same way today.

So, next time you think about selling an asset to a chinese buyer or investor, give some thought to how you can build a long lasting and sustainable relationship which will go far beyond this one particular transaction? Rather than focusing on the price, think about how you can create more value on both sides? What else can be brought into the deal to make it bigger and better? How would you approach this deal if you were negotiating with a close family member? How can this transaction be the start of a beautiful long term relationship?

From my experience, the best deals are done by those who focus on the value for both sides, and the mutual benefits, rather than just the price. But it requires a different way of thinking about what you are selling and why. You may have to postpone that round the world cruise or flashy car for a few more years, but you’ll be better off in the long term if you cultivate a strong friendship with a wealthy Chinese entrepreneur and his/her inner circle who can help you build a successful global business and a life of abundance.

So, next time you think of selling an asset or business, or you’re an agent or intermediary acting on behalf of the vendor, get on the ground and take that first cup of tea! 

Download my latest ebook: Three Cups of Tea: A 3 Step Guide to Doing Business in China