An Offer You Must Refuse… to Make

There are many situations in business negotiations where a buyer or seller must make the opening offer, even though they might prefer not to. There are effective tactics to employ when one is forced to make the opening offer, and I cover those in some of my other material. But in this article, I’d like to talk about the opening offers you should never make. Ever. Unfortunately, many people make these kinds of offers every day in business negotiations. And the results are typically not positive.

These “bad” opening offers can come in a variety of packages, but most can be grouped into what I call Dummy Offers. There’s two reasons for the name. One, the offers are not genuine, or serious, so they’re like a dummy, or fake. Second, and more importantly, the Dummy Offers are made by dummies, or people who don’t know any better (but should). And how do I know about Dummy Offers? Because I have been the dummy making them, plenty of times, and believe me, the results usually made me feel pretty dumb!

The first Dummy Offer is the “informal offer”. It goes like this: the buyer is looking at the business for sale and is talking and talking and casually mentions to the seller what he thinks would be an appropriate price to pay. Just an informal, off the record, comment. Right?

Wrong. While the buyer thought he was merely whetting the appetite of the seller, to sort of “warm her up” to where he was going to come in at, what he really did was to set a base standard in the mind of the seller, a rock-bottom limit to what the seller should take. Sellers seem to have this innate sense so that whatever price they hear from the mouth of the buyer, it is the lowest possible amount the sale could possibly settle on.

In other words, in the seller’s mind the price negotiation was heading only north from that point in the transaction.

This is done frequently by buyers. Of course, they never intend to lock in a bottom price. But that is exactly what happens. The “informal offer” is an uninformed offer, and should never be made, unless it is part of the plan of the buyer for other reasons (but that is a different subject altogether).

When you are in a business negotiation, you have to consider everything you say to be something you would write, because the opposing parties don’t forget. If it works to their advantage, they will remember it and they will surely hold you to it later on.

Another Dummy Offer, often made in preliminary business negotiations, is the “range offer”. Like the informal offer, the range offer sets expectations in the mind of the other party that are hard to break. I’ll share an example:

A buyer is looking at a business to buy. The buyer gets a meeting with the seller and in the course of conversation, the seller asks her what she thinks the business is worth. The buyer, thinking that this is part of the normal process of arriving at a price blurts out, “Oh, in the range of 5 to 700 thousand.”

The buyer thinks she just told the seller she might be willing to pay more, but hopes to get the business for closer to $500,000. But it’s not what the seller heard. All he heard was: “This business is worth AT LEAST seven hundred thousand dollars to her”.

Like the informal offer, the range offer alerts the seller to a price, and the seller’s expectations are set based on what he hears the buyer say. The “range” offer doesn’t really communicate an estimate of how much the business is worth; it communicates a number that is either at the very top, or at the very bottom, and it becomes the starting point for all future negotiations.

This principle of Dummy Offers applies both ways. The examples above illustrate misunderstandings by sellers, but in the same way buyers can get the wrong idea when a seller shares his or her mind prematurely.

Astute buyers and sellers recognize the learning and implementing of effective negotiation skills involves knowing when to be silent and when to share one’s intentions with the other party. Doing it properly can bring significant beneficial results, while ignoring it might get you stuck with an offer you can’t refuse… because you already made it.

by Rhett Kniep, CBI, M&AMI, Centurion 7 Business Advisors