What’s the financial impact of negotiation? What will the impact of that concession be on gross margins? How will a three-year commitment impact valuation? What’s the cost of agreeing to 90-day payment terms?
Do your negotiators know the answers to these questions? How many of them understand what working capital is and why it matters? Do they really know what EBITDA means? Have you tied their KPIs to the right metrics?
The Answers Aren’t Clear
These are the kinds of questions we ask our clients at Watershed Negotiations and, unfortunately, the answers aren’t stellar. People love to talk about negotiation strategies and tactics, but they fail to align those strategies and tactics with the right financial metrics. The end result? They’re often leaving far too much money on the table or, conversely, are pushing for unrealistic goals because they don’t understand or appreciate the financial limitations of their negotiating partner.
When they’re preparing for a negotiation, they need to incorporate basic financial research into their plan. If the company they’re negotiating with has public debt or equity, there are 10Ks / 10Qs, annual reports, investor presentations and research reports to parse through (or feed into AI for review). If their negotiating partner is private, AI is also increasingly effective at providing good guesstimates of revenue, margin profiles, etc. Will it be perfect? No, but with some clever prompting you can get a general sense for what you’re dealing with.
Why it Matters
The financial impact of negotiation is critically important. Understanding your partner’s margin characteristics gives you insight into how much leverage you hold in a negotiation. You also need to assess whether your customer or supplier faces liquidity constraints. A company carrying substantial debt may prioritize different outcomes than one with strong capitalization. For example, they might accept significant margin reductions in exchange for shorter payment terms or prepayments. Your team also needs to understand how investors value your business and approach their negotiations with that perspective. If you run a fast-growing SaaS company trading at seven times revenue, a $50,000 concession from a sales rep doesn’t just reduce revenue by $50,000; it erodes $350,000 in enterprise value. To get your team to think like owners and negotiate accordingly, equip them with a working knowledge of valuation.
It’s Costing You Real Money
We aren’t arguing your sales and procurement teams need to be able to construct detailed financial statements on a napkin (although bonus points if they can!). That said, if you want them to make value-maximizing decisions when they’re negotiating with suppliers and customers, you need to arm them with a solid base of corporate finance literacy. In our experience, that knowledge isn’t common and it’s costing you real money.
Your team needs to understand MDOs, LAAs, and ZOPAs, but they also need to build every negotiation plan around a well-structured financial analysis.