A business deal refers to a mutual agreement or communication between two or more parties who want to do business. The deal is usually carried out between a seller and a buyer to exchange items of value such as goods, services, information, and money. It is considered to be completed or finalized if two or more parties reach an agreement on the terms and conditions of the deal.
Both parties must decide on the terms and conditions of the deal that they deem essential to protect their interests and rights. They then conclude the deal, which may include both signing papers where the terms of their business deal are written out.
Advantages of a Business Deal
A business deal may offer any of the following advantages:
- It enables organizations to share or pool their resources, which may mean more efficient utilization of the resources.
- It helps an organization to plug any loopholes that may exist in their business operations.
- Organizations are able to place more focus on their core competencies without worrying about other, non-core jobs.
- When a company wants to expand its business by entering another territory, deals with other business organizations that are native to the area and know its economy well can help the company get started in doing business there.
Disadvantages of a Business Deal
Along with its benefits, a business deal may also carry some disadvantages:
- A deal can “go bad” when one of the parties fails to honor the terms of the deal. This can create tensions and lead to loss of capital and resources for both parties. If issues remain unresolved, the end result could be a lawsuit, further eroding capital and resources, and potentially damaging the reputation or public perception of one or both parties.
- The commitment to a deal with another company may eventually require more time and resources than one of the parties envisioned. Holding up their end of the deal may, thus, lead to the company operating less effectively or efficiently in their core business operations. That, in turn, may lead to missed opportunities or lost revenue.
How to Negotiate a Business Deal?
To ensure the success of a business deal, take note of the following tips:
1. Get the right people/main decision-makers to the table
Before you start negotiating any deal, you need to have the right people present. To reach an agreement, it is crucial that the ultimate decision-makers are present. Before the commencement of negotiations, make sure that the other party is also fully authorized to make binding commitments. This is to avoid finding yourself in a situation where you believe you have struck a deal with the other party, only to learn that the agreement needs to be approved by someone higher in the chain of command.
2. Be well prepared
Successful negotiators in a direct negotiation always ensure that they are prepared and have a plan. For you to negotiate effectively, you need to engage fully, making use of your formidable frontal brain, skillful techniques, logic, and reason. You need to brainstorm creative approaches to be able to explore possibilities without limiting yourself to one particular path.
Even though it is important to set your priorities and alternatives in mind, it is similarly vital to be open. You need to be open to any new information and data and weigh it impartially to determine whether an idea other than your original one may be a better option.
Preparation also consists of building rapport with your deal counterpart. You need to take the time to understand their company and its organizational culture. Getting a good understanding of who the other party is will help you assess better whether a merger or partnership is feasible (e.g., How will your personnel work together and what are the challenges that you may face?).
3. Never underestimate your risks
You may be well aware of the potential benefits of a proposed deal. You should also give careful consideration to potential risks. Objective evaluation of risks is critical to reaching an agreement that both parties can live with.
4. Focus on the key issues
When negotiating a business deal, it is important that you are aware of key issues and focus on them so that you don’t get side-tracked. Avoid getting bogged down in discussions of minor issues. Focus on the important issues that will drive a resolution.
5. Memorialize the deal
After a verbal resolution is reached, you should record it in a short agreement form of one to two pages. You don’t need to extend the process by trying to work out every single detail. The key points should be written down since deals often die because of a lack of momentum.
A deal is an agreement between two or more parties (commonly, a seller and a buyer) who want to do business together by exchanging goods, services, or information for money, under certain terms and conditions. A business deal comes with its fair share of advantages and disadvantages. To get the best out of a business deal, the parties involved need to put in place effective negotiation strategies.
CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst.
To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below:
- Confidential Information Memorandum
- M&A Considerations and Implications
- Sale and Purchase Agreement
- Types of Due Diligence
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