Opening Offers in Negotiation

Whether negotiating in a mediation or directly with an opposing party, everyone has to start somewhere—so where should you start a negotiation? It may seem smart to begin with the absolute highest (or lowest, depending on one’s side of the “v”) offer one can possibly make. However, that can be counterproductive. The first offer is important. It sets the stage for the negotiation and can impact whether a case will settle as well as the ultimate settlement amount. Here are a few considerations to keep in mind when determining that first offer.

Negotiation Exercise. The first mediation training I took put the class through a fascinating exercise. The fact scenario was straightforward: A business was winding down and had to sell its inventory. The negotiation was between the seller and a purchaser to buy the inventory, which had an undisputed market price. The class was divided into buyer and seller pairs to negotiate the sale. Authority was provided for the seller group (the lowest amount it would accept) and buyer group (the highest amount it would pay). There was a large overlap in that authority, which meant that deals could be made easily across a wide price range. Fifteen sets of attorneys negotiated the same transaction, after which the following information was charted: whether the buyer or seller made the first offer, the amount of each party’s first offer and the final price.

Lessons Learned. Did those who made the most extreme offer fare best? They did not. In fact, parties who made the most extreme offers received worse deals in the range of deals made. Parties who started with less extreme opening offers made better deals. Here are some key reasons why an extreme offer strategy is not successful:

• Chilling effect (other party does not engage)
• Credibility questioned
• Trust eliminated; suspicion maximized
• Pivots negotiation into a competition versus an exploration

Best Practice in Mediation. Mediators are often faced with an initial, extreme offer by one party. Should we take it to the other side? After all, the first round in mediation is early to start arguing, plus there are methods we can employ to lessen the impact. Personally, I keep the insights learned from this exercise in mind and find it valuable to share them. Not many parties have had the opportunity to have a transparent view into the same deal negotiated 15 different ways to see what works and what does not. I think it is a best practice to have a conversation about what I believe may be an extreme offer and why reconsideration is warranted. It may be that the party wants to proceed anyway. But given that the opening offer can negatively impact the ultimate settlement, the potential consequences should be discussed. And if there are other drivers behind someone’s first offer—like anger or a desire to punish—well, there is no time like the present to discover those motivations and start talking about them.

Opening Offer Elements. What is a productive opening offer? There are essentially two key components:

• The offer should have a rational basis from the perspective of the opposing party. This typically means it should be tied to a likely result at trial.

• The offer should confer a benefit to the opposing party.

While there is (a lot of) room for disagreement for whether something has a rational basis and what is a likely result at trial, the key is to be within the range of reason from the opposing party’s perspective. For example, in the exercise above, some of the extreme offers to sell were higher than the market price of the inventory—an amount no rational buyer would pay. There was no incentive for the buyer to accept the offer, and therefore no incentive to seriously consider the offer and engage. Consequently, to make a deal, the seller had to make larger moves that were never matched by the buyer.

Mediator Value Add. If only it was so easy to have a known and exact alternative to a deal such as an undisputed market value for inventory! Parties and cases are always more complex. It can be tricky to determine what is reasonable for both sides. A mediator can add value by providing input regarding this important first step in a negotiation.

Ann T. Marshall joined JAMS in 2020 after litigating for over 25 years. She has a substantial amount of experience in real property, commercial finance, consumer lending and other commercial disputes. She was routinely retained by title insurance companies to represent their insureds. She also represented both policyholders and insurers in coverage disputes.