A BATNA (Best Alternative to a Negotiated Agreement) analysis is an extremely useful negotiation strategy to assist in reaching the best possible deal. Keep reading to uncover what a BATNA is and how it can help you.
What is a BATNA analysis?
BATNA stands for ‘Best Alternative to a Negotiated Agreement’. This tool was developed in 1981 by Roger Fisher and William Ury in the book ‘Getting to Yes: Negotiating Agreement Without Giving In’. The BATNA strategy recommends that before entering and concluding a negotiation, you should assess what the best alternative will be in the case the negotiation fails and/or there is a superior alternative.
This allows you to prepare yourself if the deal does fall through, but also is helpful as it can put into perspective whether perhaps the negotiation is not your best course of action. Importantly, undertaking a BATNA provides a valuable negotiating tool, as it also considers what your interlocutor’s BATNA position is.
BATNAs are critical to negotiation because you cannot make a wise decision unless you know what your alternatives are.
How do you work out your BATNA?
The first step of determining your BATNA is to identify any feasible alternatives to the deal which you will be negotiating. Evaluate potential alternatives and select the option which possesses the highest expected value.
Once you have decided on the highest value option, take this best possible alternative and calculate the projected revenues and costs. You now should have your best alternative price – the lowest value deal you will be willing to accept in your negotiation – and an alternative to offer bargaining power.
How do you use the BATNA analysis?
If the proposed agreement is better than your BATNA, you should accept it. This is the ideal result and the best outcomes occur when the BATNAs of both parties are equal, allowing the parties to reach a mutually beneficial agreement.
If the agreement achieved is not better than your BATNA, you should reopen negotiations until the deal is of higher value than your alternative. If after reopening negotiations, you cannot improve the agreement, then you should at least consider pursuing your next alternative.
As an example, let us assume that your current lease stipulates:
|Current Base Rent||$162,750|
|Total Average Gross Rent||$203,438|
|Total Current Sales||$1,000,000|
|Total Occupancy Cost Ratio||20%|
Now what if your landlord proposes a 10% increase on the existing lease with 5% annual rental increases? The Net Present Value of five years of future rent at the current store = $980,044.
Your ‘Best Alternative to the Negotiated Deal’ is to move to a new centre where you will get a:
20% reduction on current rent, contribution to fitout of 10% and new fitout of $90,000. However, your sales will decrease from $ 1,000,000 to $950,000 per annum. The Net Present Value of five years of future rent at this store = $814,009.
As the alternative is better than the current agreement, you should reopen negotiations to try reach the break-even point of a 5% rental reduction. If the agreement cannot reach this break-even point, all else equal, the best alternative will be to relocate to the new centre where you will be better off overall.
Using your BATNA as a negotiating tactic
Your BATNA does not always just have to be hypothetical, it can be a practical tool used to encourage a Landlord to disclose their true position.
You should genuinely search and research your best alternative location.
Start the lease negotiation process early – ideally at least 18 months before lease expiry. Look at tenant rollover rates in the subject centre and make applications at alternative sites.
It is likely that if you are making alternative applications, other managing agents will contact your current centre’s managing agent for a trade reference, at which point your Landlord will know you are serious about alternative options, thus making it more likely your Landlord discloses their true position and can make you an improved and honest offer.
This post was authored by Simon Fonteyn. Simon is one of Australia’s leading experts in retail, childcare and medical leasing and rental valuations. He holds a Degree in Accounting & Finance, a Diploma of Valuation, a Masters of Management and is an Associate of the Australian Property Institute. With over 25 years experience in the commercial property industry, Simon founded LeaseInfo® as a way to provide more transparency to the industry.