Buyer’s negotiating strategy in international sourcing

A focus on the human touch

As in any profession based on human relationships, buyers' performance can involve efforts to
align themselves with their contacts. By being open and empathetic, buyers can let their
personality shine through, better understand their contacts' needs and adjust the methods they use
to reach a compromise. While this approach is already widely employed in the business world, it
is becoming a "positive negotiation" tactic in procurement, where being in tune with suppliers
involves trying to uncover quality relationships based on trust and transparency.

Making compromises together

Positive negotiation can take the form of a collective approach to making procurement-related
compromises. Furthermore, because it is based on the advantages of conversation, this tactic is
consistent with creating healthy and long-lasting relationships built on solid foundations. In other
words, a "blank page" is needed when starting to look for a compromise. With this approach, the
ins and outs of the negotiation are addressed in full, one after the other. This ensures that
there are no "hidden weaknesses".

The role of mediator

Procurement departments may choose to take on the role of mediator during positive
negotiations. Buyers are then able to ensure that goods or services are acquired through an
objective analysis of the advantages offered by each stakeholder. Regardless of the features
of the supplier's goods or services and irrespective of the buyer's needs, the negotiation is
primarily motivated by the desire to preserve the interests of each party. Maintaining a good
understanding and healthy, long-lasting relationships gives this negotiation tactic its positive
dimension.

The technician's deterrent

The technician's tactic in positive negotiation draws its strength from an expert's almost-infallible
nature. It's a type of soft deterrent tactic. By showing that they have a deep understanding of
negotiations in general and how they work, buyers discourage the other party from bluffing or
using tricks. All they need to do is adopt a relevant and discerning critical stance. This approach
will still demonstrate ethical values as long as buyers' tactics remain "inoffensive". Buyers thus
protect their interests by blocking off all the entry points that would give them a less
advantageous position in the negotiation.
An iron fist in a velvet glove

Positive negotiation also relies on more forceful tactics. However, this approach is still
compatible with moral ideals, as being firm does not necessarily equate to an aggressive
relationship. As soon as the negotiation begins, buyers can outline how far they are
prepared to go in order to clearly establish the amount of room for manoeuvre. As a result,
transparency and honesty take precedence, and conversations are held with mutual respect. This
negotiation tactic is still positive because it neither overpowers suppliers nor makes them feel
uncomfortable. It is not a matter of cutting them off, but of transparently addressing the terms of
a good business agreement.

Drawing the other party in like a storyteller

Procurement departments can also take inspiration from the skills shown by speakers,
rhetoricians or storytellers. This positive negotiation tactic is shaped by buyers' ability to get
their suppliers on board with "predictions" about their activities. Going beyond throwing well-
thought-out arguments and counterarguments back and forth in order to reach a
compromise, this negotiation tactic relies on the power of the imagination. When this story is
based on ethical values, the positive aspect is achieved. In this way, storytelling draws listeners
into the idea of protecting society and the environment, while writing buyers and suppliers into
the same narrative.

Negotiating sales export transaction

1.Know your Incoterm
Use internationally recognized Incoterm to clarify the tasks, costs and risks for buyers and sellers
in these transactions. Incoterms, widely-used terms of sale, are a set of 11 internationally
recognized rules which define the responsibilities of sellers and buyers. Incoterms specify who is
responsible for paying for and managing the shipment, insurance, documentation, customs
clearance, and other logistical activities.

2. A pro forma invoice

It is a quote in an invoice format that may be required by the buyer to apply for an import
license, contract for pre-shipment inspection, open a letter of credit or arrange for transfer of
hard currency.

A pro forma may not be a required shipping document, but it can provide detailed information
that buyers need in order to legally import the product.

Pro forma invoices basically contain much of the same information as the formal quotation, and
in many cases can be used in place of one. It should give the buyer as much information about
the order as possible so arrangements can be made efficiently.
The invoices inform the buyer and the appropriate import government authorities details of the
future shipment; changes should not be made without the buyer’s consent.

3. Determine the Export Landed Cost with Tariffs/Taxes

Buyers will ask for the landed cost, or total price of getting your export shipment to them. This
includes foreign tariffs and taxes.

4. Methods of Payment
.

To succeed in today’s global marketplace and win sales against foreign competitors, exporters
must offer their customers attractive sales terms supported by the appropriate payment methods.
Because getting paid in full and on time is the ultimate goal for each export sale, an appropriate
payment method must be chosen carefully to minimize the payment risk while also
accommodating the needs of the buyer.

5. Export Credit Insurance

Export credit insurance (ECI) protects an exporter of products and services against the risk of
non-payment by a foreign buyer. In other words, ECI significantly reduces the payment risks
associated with doing business internationally by giving the exporter conditional assurance that
payment will be made if the foreign buyer is unable to pay. Simply put, exporters can protect
their foreign receivables against a variety of risks that could result in non-payment by foreign
buyers.

Financing For International Buyers: The principal export transactions are those which involve
sales direct to users and to resellers in open marketing channels, to distributors in an established
channel of distribution and through agents. They are characterised by a mutual dependence
which can be transitory or enduring and regulated by the agreements which legitimise them. The
parties seeking to enter these agreements do so because they have simultaneously a reason to
cooperate and, because their expectations differ, a reason to be in competition. Competition
begets conflict, and bargaining and negotiation take place to help resolve the conflict.
Negotiation outcomes depend on how the parties interact with, and on, each other and these hang
on the behavioural predispositions of the negotiators, the situational and environmental
influences on them and the influence strategies and skills they use (McCall & Cousins 1990:
10–13).

Characteristics of Export Sales and Distributorship/Agency Agreements

Export sales agreements and distributorship/agency agreements differ in a number of

respects. Thousands of sales agreements are negotiated every day whereas
distributorship/agency agreements are made (and terminated) much less frequently. The
 agreement of sale is characterised by its capacity to create profit or meet other objectives
of the selling organisation while that of distributorship/agency provides the basis under
which profit may be created in the future and is normally seen as long term in its strategic
view. A sale can be a one-off episode or linked with others which precede or follow it;
distributorship/agency is an on-going relationship subject to the pressures of change in the
context in which it is played out. This chapter addresses the fully negotiated sales/purchase
transaction which subsumes other and more limited kinds of sales transaction. Issues to be
negotiated in sales contracts range from contract scope, delivery, terms of payment,
performance, specification, service and arbitration to simple reduction in price or minor
revision in terms; in distributorship/agency contracts, negotiations are dominated by issues
such as exclusivity, extent of territory, supplier support, terms of payment, commission and
commitment to the relationship in terms of investing in it. The process is one in which
confrontation is more likely to occur in the actions of people brought up in certain cultures
and is also more likely to happen in sales negotiations than in distributorship/agency ones.

Agreements of Sale

The Bargaining Framework

Sellers will normally know their costs and will have established a minimum price below
which they are not prepared to go while buyers will have determined a maximum amount
over which they cannot or will not pay. The range within which they will settle will lie
between that figure and the price of asking/offer. Where these ranges overlap is the area of
negotiation. Karrass (1974) makes the point that the settlement range is “the buyer’s
estimate of the seller’s minimum and the seller’s estimate of the buyer’s maximum”. The
heart of the negotiation process is the information the parties can extract from each other
and use for mutual influence. This can change the seller’s and buyer’s perceptions of what
the other will pay or receive and is the strategic function of the face-to-face situation.
A seller’s level of first offer will be affected by factors such as need to cover fixed costs,
maintain cost/profit/volume advantages, long term aspirations, contractual risk,
contingency amounts and the relationship between the parties. A Norwegian, coming from
a country with a low power distance and a consensus tradition will expect the offer to be
close to the final price. In Brazil, a high power distance country with high uncertainty-
avoidance, there is evidence that the readiness of Brazilians to make concessions leads to
the perception that prices are inflated. The dilemma confronting the seller is to pitch
the offer at a level that takes these factors into account but will not shut out the business.
A buyer has to consider his level of first offer in relation to time costs as any delay brought
about by extended negotiation times may result in higher costs or cause delay in
completion. The relative power residing with the buying/selling parties will bear on levels
of first offer and hence on outcomes. This can change over time and can be affected by
environmental factors such as changing market structures, alterations in consumer
preferences and varying exchange rates; and also situational factors like the degree of the
seller’s need for the work and the buyer’s need for the product or service. Power can
 often be built into a situation by the collection, analysis and use of all relevant
information, e.g. data on tariff reductions on the occasion of the accession of Austria to the
European Union.

Face to Face If the selling organisation has a good reputation in the buyer country and/or
has put forward a quotation based on prior contact with the buying organisation to
establish what it really wants and has supported this with appropriate selling and
influence activities, then the invitation to enter negotiations is a foregone conclusion. Even
at this early stage there are differences in what constitute appropriate influences. Attempts
to go over the head of the person responsible for negotiations may be quite acceptable in
low power distance places like Israel or Scandinavia but unacceptable in places where
hierarchy is strong as in France or relationships vertical as in Japan. A seller, in advocating
his product, may sell its consideration by stressing its innovativeness in the USA or France
where technical advances are welcomed, its assistance to performance in Germany where
dependability is valued highly or what it will do for the buyer’s or influencer’s standing in
England where image is an important attribute in establishing an individual’s power base.

The Agenda The negotiation agenda can itself be negotiated and can be used to
strengthen the position of one or other of the parties. For example, if the sellers have
discovered in pre-negotiation contact that the potential buyer puts a premium on
performance guarantees and wants to use this leverage on performance to draw out a better
price, then they can ask to have performance guarantees put ahead of price on the agenda
and put up strong resistance when guarantees come up for discussion. After this has gone
on for some time to no avail, the suggestion can be made that it might be better to return to
the issue after price has been discussed, the implication being that if the customer gives
on price, they might be prepared to give on performance guarantees (MacMillan 1978).
But not everyone likes to negotiate an agenda. Many Swedish businessmen consider it
honest and efficient to prepare an agenda in advance and keep to it and see such activity as
sharp practice (Philipps- Martinsson 1981).

Finding the Negotiation Range At the opening stage of discussions, negotiators seek to
explore the entire area covered by negotiations through the taking up of extreme positions
which include their hopes for outcome plus the concession factors built in to their levels of first
offer. The kinds of question asked and statements made will be conditioned by attitudes created
by prior knowledge the participants have of each other and experience of prior negotiations
with their organisations. If a quotation or offer has been made, this will form the starting point
for the dialogue. The language used at this juncture will, certainly for Europeans and
Americans, be forthright and uncompromis- ing: “Do you mean to say that you cannot supply
for less than . . .?” “We couldn’t possibly agree to such a low price — you don’t appear to
appreciate the quality built into our product”. The problem for negotiators in these skirmishes is
to identify if there is a gap between what the other says and is prepared to do. If the other’s
language is strong and simple, there is a presumption that the commitment is considerable.
The less ambiguity there is in their statements, the greater can the other’s commitment be
taken to be. Where there is an overlap in the bargaining zone, the negotiator should be able to
identify all the individual issues which comprise the negotiating area. Where there is no
overlap, the lowering of aspirations is of critical importance. If either of the parties is
convinced that the degree of movement needed can be achieved, this they may do by
negotiating with their own management or team for a revision of authority or seeking to get the
other party to obtain revised authority
Such confrontational means of determining the negotiation range sit uncomfortably in an
East Asian setting. Confrontation threatens face and other means are employed to establish
the issues that separate the participants in the negotiation. Similarly, the Latin American or
Arab buyer often bases his buying decision on the personality of the salesman and not on
the quality of the product (Muna 1980: 30). It is the salesman’s ability to strike chords in
him that makes the buyer decide and confrontation is not the way to the relationship that
aids this decision. In these circumstances, the opportunity should be provided to start in a
more cooperative or relationship-inducing mode. People of other nationalities adopt similar
behaviour if they have had a good relationship and shared satisfactory recent transactions.
When the people involved in the negotiation take up their positions strongly and reinforce
them with harsh and unyielding repetitions of their basic position or variations on the
same theme, the situation can rapidly deteriorate into what has been called “attack/defend
spirals” from which it can be difficult to escape although technically agreement is still
possible.

Escaping Impasse

Playing the strong negotiator can be overdone. If a negotiator is compelled to withdraw

from a position of extreme firmness in the face of an opponent’s pressure, the loss of image
will be carried over to other issues and subsequent negotiations. A buyer or seller has to
strike a balance between firmness and credibility. If on the other hand they have got
themselves into an attack/defend spiral, then to escape this dilemma they have to signal a
willingness to move from initial stances they have taken up. It is encapsulated in the phrase
“to convey without commitment”, e.g. “If you were prepared to accept a later delivery, we
might consider a reduction in price”. A suitable reply might be “We might consider
such a step should you find it possible to . . .”. The possibility of agreement has been
created without the parties committing themselves. Not only the words spoken but the pitch
and stress used and signaling action such as that shown in negotiating the agenda, are
indications of a willingness to move.When one of the parties is of a very different culture,
the time taken is likely to be longer and cues are likely to be more specific: “This is what
we did in the case of . . .” Where a practical demonstration is required as a signal of
intention, this can often be given by conceding a “straw issue”

Identifying Common Ground

When movement has been initiated, the negotiators can test the assumptions they have
made concerning the commitment of the other side to the issues on which they appear to be
adamant and can ensure that the commitment to the issues that matter most to themselves is
maintained. The example below is of further probing behaviour into the other’s commitment
to the issues taken to be important at the stage of exploring the negotiation range.
“How reliable are your new drive motors in high ambient temperatures?” Here the buyer is
asking an apparently innoc- uous question. If the reply is a general one about the high quality,
a supplementary question might be asked: “Have you had any problems with them in
installations similar to the ones we are considering?” The question is now more specific. “ If
the questioner possesses information about problems at such installations, then the question is
loaded. It is designed to force an admission. A wise seller would assume knowledge by the
buyer and perhaps turn it to advantage by demonstrating a cooperative and open attitude: “We
did have problems at the plant of X Company. That was a fabrication problem which we have
now overcome”. He might go on to emphasise the lengths to which his company had gone to
resolve the problems, so demonstrating commitment to the customer’s interest. “The problem
was one of breaking rotor bars that tore the windings of the stators. What we did was to recheck
our designs and ask an independent engineering laboratory to perform a similar exercise in
parallel. Having confirmed there was no design fault, we then checked our construction
methods and found that a new machine being used to fit the rotor bars to the rings was leaving a
certain play in operation which led to breakdown. Our current methods positively preclude
this”. The seller’s position may have been slightly weakened but nothing like the extent to
which it would have been had he denied the existence of a problem.
“In that case the buyer might have come back: “Do you deny that you have had
problems at X Company?” The question is now a pointed one, framed in a way that
requires a simple “Yes” or “No” as an answer. These are perhaps the words which best
show how great the commitment is. The buyer was reasonably sure, or should have
been, before putting the question in that way, of the answer he was going to receive.
From a position in which he was seeking information, he has moved to a position where
he has forced an admission and is now poised to extract a concession. “In our business
down-time of any equipment is revenue lost. You are asking us to pay these prices for
machinery which we would have to take largely on trust?”
If the seller in the above exchanges denies that a problem exists or has existed
until recently, he loses credibility as a negotiator on this and any other issues in
conflict He has been caught out because of the information held by the buyer and his
bargaining position has been weakened (McCall & Warrington 1989: 198).

The negotiation seeks progressively to sort out those issues on which the parties are obdurate
and those on which they are ready to concede provided there is an equivalent concession in
the overall package eventually agreed.
It may not be possible to find concessions of equal worth on individual issues. It is
more likely that equitability is obtained by relating the issues to the overall agreement. For
this reason good negotiators do not seek to obtain a fair exchange of resources on individual
items. They reserve their positions until they know what the extent of all the issues is and
achieve perceived equitability in the overall package agreed.
In Western Europe and the USA in particular, the more precisely a position is defined, the
stronger is the definer’s commitment likely to be. If an Arab speaks like a person from one
of these parts of the world, he is either attuned to Western culture or his commitment is
not great. Because his language, built as it is on the beautiful style of the Koran, is not
perfectly suited to the demands of modern commerce, he has to exaggerate and elaborate on
it to create meaning (Shouby 1951). The Chinese do not seek to identify where common
ground exists by confrontational means. To avoid possible loss of face they set about
obtaining information by an apparently endless string of questions to build up a picture
they feel will be acceptable to both parties. It tests to the full the cultural sensitivity of the
foreign negotiator.
In all these exchanges it is important to create the climate of understanding by
communicating as far as possible in a way in which the utterance of one party has a true
reflection in the felt meaning of the other. Even in places as geographically close as some
European countries, there can be wide difference in business thinking (Laurent 1983) and in the
wider national perspectives (Hofstede 1991; Hampden-Turner & Trompenaars 1994). The skill
is to match what is being said to what is understood In support of a commitment and in defence
of any attack made on it, a negotiator can plead limited authority. One of the weaknesses of
high level negotiators is that, while they can exercise more discretionary judgement, they are
less able to appeal to limited authority as a source of negotiation power. A buyer who cannot
approve an order over a certain value, or a salesman who does not have the authority to vary
terms, is more difficult to deal with than someone who has. Restrictions on authority like
budget limits, credit limits, cash discount limits, house rules against divulging costs, fair
trading laws, specification changes, all give their user negotiation strength

Trading-Off :The very fact of identifying common ground isolates those areas where
there is no common ground and there is conflict to be resolved. Once commitments have
been demonstrated and tested the participants can proceed to the bargaining process in
order to bring the two sides closer together. A seller might agree to an earlier delivery
provided the information allowing him to proceed could be produced within a stipulated
period. A buyer might agree to a reduced penalty for late delivery if the seller would
requote and accept payment in the buyer’s country currency To come to an ultimate
bargain, a negotiator has to assess what constitutes a fair outcome. If all issues are to be
part of an overall package, then a judgement has to be made on the spot. This hangs on
earlier preparation, both in relation to the costs of possible trade-offs and the
communication arrangements between negotiators and the team that they are representing
for quick handling of queries on such things as specification amendment and delivery. If a
potential purchaser is required by his central bank in Chile to pay no more than 6%
interest on an extended payment contract, and the supplier has a going rate of 10% in his
offer under negotiation, then the supplier’s negotiator has to be able to recalculate the offer
including the unwanted 4% in the capital sum and showing an interest rate of 6% to
meet the customer’s needs. He is expected to have the authority of the company to do this
and the capacity to do so without hesitation.
Some elements which are traded off are worth less than, or more than, any figure
determined by an accounting convention. If a seller is less interested in immediate profit
than in a long range goal like obtaining a foothold in a growing market, then he may be
prepared to trade it off for a value much less than cost. If a buyer in Poland is prepared to
pay up to ten times the value of an essential part because that was the cost of the loss of
a week’s production, a seller might just take advantage of this and charge above the going
 rate.
The problem of setting a value on concessions is made more difficult by the fact that
some aspects of a concession are not measurable in money terms. With penalty clauses in
contracts, for example, these “should bite into the profits of the seller” to encourage the
seller to maintain promised delivery or performance. But if the rates normally used are 3%
up to 10% per month or more, and what is asked is well in excess of what is normal, then
this combined with the probability of a penalty being incurred, may raise the monetary
equivalent value.
Neither buyer nor seller knows exactly how far he can maximise his advantages. A negotiator
can only make assumptions about an opponent’s preferences, expectations and goals. It is the
testing of these assumptions that is a prime function of negotiation and the interpretation made
will vary with the experience of the tester.
In testing assumptions negotiators are careful to mitigate the extent of any apparent
disagreement by revealing, or appearing to reveal, what is going on in their minds, as in “I
am very concerned that we seem to be so far apart on . . .”. There are two forces at work on
the seller and buyer. One is the esteem motivation that drives them to strike the best
possible bargains and provide the satisfaction of a job well done, perhaps establishing a
precedent for future negotiations. The other is the security motivation to settle when a
reasonable bargain is identified, rather than seek a more advantageous outcome at the
possible risk of not reaching agreement.
It is against this background that buyers and sellers convey to each other, by the moves and
countermoves they make, how they see a resolution of their differences. This is the time when
they have to bring together all those items they have promised to “consider”, “bear in mind”,
“take account of” — and all the other phrases used when waiting to establish the full
negotiating range before making a commitment on issues and put forward a package for the
consideration of the other party.
In Western cultures the negotiator may look his opponent straight in the eye and speak with a
tone of complete finality supported by corresponding non- verbal language like sitting back
with arms folded and putting papers in order. The language is terse and to the point, confirming
the finality: Sometimes, perhaps during a break, the negotiator may have signalled intentions by
treating the opponent with a greater degree of familiarity, using cordial expressions and similar
manifestations of intimacy. Phrases like “I have done as much as I can. Now it’s up to you”.
In Eastern cultures signals may not be so apparent. It has been reported by Pye (1982) that
Chinese negotiators never telegraph their next move through a show of emotions. The level of
friendliness or impersonality remains the same whether negotiations are approaching agreement
or failure. To Western eyes a sudden move to agreement following the seemingly endless quest
for information comes as a considerable element of surprise.

Making the Agreement The position has now been reached where the area of conflict has
been reduced to a point at which the negotiators are in a position to assess the possibilities of
early agreement. One or the other will put forward his proposal for the final bargain. This will
normally be in the form of a package because issues have been kept linked while matters in
conflict have been addressed. In major sales agreements characterised by some complexity,
more than one package may be proposed.
Agency agreement

An agency agreement is a legal document that binds two individual partners: the principal and
the agent. The principal is the person doing the hiring. The agent is the individual who will
complete the tasks on behalf of the principal. The agreement often creates a legal relationship
and type of proxy status between two parties.
Agency agreements are often used in the following situations:

 Outsourcing vendors
 Hiring legal representation
 Working with realtors
 Hiring an accountant
 Using marketing services
 Employing investment brokers
 Business employees making decisions for their employer

Creating an Agency Agreement

The agency agreement created between the two parties should include the following:

 Expectations of the agency agreement

 Specific services of the agent
 Geographical location of the agreement
 Payment amount and terms
 The process of dispute resolution
 An agreement on governing law
 Duration of the partnership agreement

Upon completion of the agency agreement contract, both the principal and the agent should sign
and print copies of the form. Both parties should have easy access to the agency agreement for
the entire duration of the agency partnership.
It is important to understand that an agency agreement is not a form of an employment
agreement. The agency agreement does not include traditional aspects of employment including
health care, time off, or retirement enrollments. Additionally, the length of the agency agreement
is often much shorter than the length of full-time employment.

Understanding the Risks of an Agency Agreement

In most cases, agency agreements are created out of necessity to create a partnership that benefits
each party. However, there are a few risks involved with agency agreements that are worth
noting.
Liability is one of the biggest risks in an agency agreement. Because the principal is authorizing
the agent to act on their behalf, they can also face consequences for the actions taken. If the agent
participates in illegal or unethical activities while representing the principal, the principal could
essentially be liable.
The best ways to avoid the potential risks of an agency agreement include the following:

 Give both parties sufficient time to thoroughly read all contracts.

 Consider the intended goals of the agreement and ensure they are carefully listed.
 Aim to be overly inclusive rather than leave out points that might seem otherwise
obvious.
 Include liability limitations of the principal in the agency agreement.
 Include breach of contract terms.
 Hire a commercial solicitor to explain the contract.
 Provide both parties with a signed copy of the contract.
 Consider notarizing the agency agreement.
 Have a unique contract drafted for complicated agreements.

Creating an agency agreement is a legal and binding document. It requires careful planning,
evaluation, and a full understanding of what it entails.

Forms of Agency Agreements

Agency agreements are useful in many different situations. The specific method in which the
agency agreement forms can affect the legalities of the agreement. These are some of the most
common forms of agency agreements:

 Verbal. Verbal agreements are the most common source of agency agreements. Agency
agreements are most effective when the verbal agreement is turned into an agreement that
is in writing.
 Statute/common law. Statute or common law agency agreements do not include an
actual contract. They arise out of necessity, and the agent is acting in the best interests of
another party, usually a party that is unable to give a verbal agency agreement.

Ratification
Ratification occurs when the principal gives consent to an action that has already occurred. This
often occurs either when the agent goes beyond the scope of the agency agreement or when the
acting party is not yet officially an agent to the principal. The principal can approve the agency
agreement at a later date, thus accepting and recognizing the actions of the agent and creating an
agency agreement in the process.

Fiduciary Responsibilities
A fiduciary responsibility is a legal responsibility to act in the best interest of the principal.
When an agency agreement is created, the agent is agreeing to always act with the principal's
best interests in mind. An ethical and legally bound fiduciary relationship includes the following
aspects:

 The agent must avoid dual relationships when possible.

  The agent must avoid placing prioritizing personal benefits.
 The agent must keep the principal's information confidential.
 The property and financial terms of the agreement cannot be misused

What Is a Licensing Agreement?

The term licensing agreement refers to a legal, written contract between two parties wherein the
property owner gives permission to another party to use their brand, patent, or trademark. The
agreement, which is set between the licensor (the property owner) and the licensee (the
permitted party), contains details on the type of licensing agreement, the terms of usage, and
how the licensor is to be compensated. Contract types vary based on what is being licensed.
Licensing agreements also alleviate any disputes related to sales, issues of quality, and royalties

Strategies for Negotiating Licenses

You will never get the license agreement your technology deserves. You get the license
agreement you negotiate. With this in mind, it is important for inventors, licensing professionals
and intellectual property lawyers to constantly hone their negotiating skills. Here are some
pertinent considerations.

Stay away from the Negotiating Table

A general principle in negotiations is that if you wait to commence negotiations until you reach
the negotiating table, you will have already squandered leverage. Much of the framing of the
negotiations can be accomplished away from the negotiating table. Inventors intent on
approaching large companies to license their inventions should realize that they are negotiating
anytime they try to influence potential licensees. Inventors can increase their potential licensing
value before approaching licensing partners by further developing their technologies; conducting
competitive intelligence into the potential licensees in order to determine how the technology can
best meet their targets’ financial and strategic goals; and, by generating buzz for their
technologies by gaining press attention by publishing (as licensing professionals monitor articles
dealing with technologies they seek) or speaking at conferences.

A few specific examples of how value can be created away from the negotiating table emanate
from Fred Smith, the founder of Federal Express. Many years ago, Smith wanted to acquire
Flying Tigers, a struggling Asian carrier that had far more assets than upstart Federal Express.
Before the negotiating began Fred Smith had his minions voice his steadfast resolve to keep his
workforce union free. He derided unions as a plague on air carriers and proclaimed that he would
never want to acquire a unionized carrier. Flying Tigers was unionized. Thus, the management of
Flying Tigers was preemptively trying to determine what concessions they could grant Smith to
compensate for the fact that they had a unionized workforce. More recently, Smith was in
Eastern Europe discussing his aversion to the bureaucracy that exists in that part of the world. In
doing so, he was planting the seeds for Eastern European governments to make concessions to
Federal Express.
Just as many generals proclaim that battles are won or lost before they are fought, shrewd
negotiators realize that they should avoid fair fights at the negotiating table. Rather, they should
have the cards stacked in their favor before reaching the negotiating table. Consider the
negotiations that ensued when Donald Trump identified the site to build Trump Tower. The
owner of the property was Leonard Kandell. Kandell was also a savvy real estate mogul who
preferred to retain ownership of the land and to lease it out on a long-term basis. Trump preferred
to lease the land rather than own it outright. One would think that an agreement between Trump
and Kandell could be reached relatively easily since there was an alignment of interests.
However, Trump knew that going into negotiations with Kandell without leverage would not
lead to the optimum results. Thus, before Trump began negotiating with Kandell he negotiated
the purchase of air rights from Tiffany & Co. During these negotiations, Trump realized that
Tiffany had an option to acquire Kandell’s property at fair market value. Trump arranged to have
this option included in the air rights deal. As a result, Trump had a stick in the form of an option
to acquire Kandell’s property if favorable leasing terms could not be negotiated.

How to Approach a Potential Licensee

There are advantages of an intermediary After the battlefield has been set, thought should be
given as to how the licensee is approached. You have the least leverage if you approach the
potential licensee directly. When inventors call licensing executives directly, their image in the
eyes of the potential licensee deflates from being a successful inventor to that of a salesman.
approaching the licensee on behalf of the inventor. First, the intermediary likely has a
relationship with the right people at the various targeted licensees. Even if the intermediary does
not have a relationship at the licensee, they are more familiar with preparing the documents that
the licensee will request to review. Finally, licensees will take some comfort that the
intermediary has vetted the technology and would not want to damage his reputation by
presenting an inferior technology.

Perhaps the way to obtain the most leverage with the licensee is to gain the support of an internal
champion. Among the best internal champions are marketing professionals who stand to make
healthy commissions on related products and subject matter experts from the research ranks. An
internal champion will be much more effective in convincing his colleagues to strike a license
agreement with your company than you will be if you simply contact a licensing professional at
the target. Since most of the discussions to be held by the targeted licensee about the possibility
of in-licensing will be conducted without the participation of the inventor, it is imperative that
the inventor benefits from the consistent application of internal pressure.

William Cotreau of DuPont makes a further refinement to the issue of identifying an internal
champion. If the technology is more pie-in-the-sky (e.g. earlier stage), technical people have
more sway as compared to when the technology is ready to be reduced to practice. In the latter
scenario the business people will hold more clout as the in-licensing of the technology will affect
their operating budgets.

Developing Walk Away Points

A fundamental principle in negotiating is that you should never enter into negotiations unless
you have the ability to walk away with reasonably good alternatives. Even during the negotiating
process, one should continue to develop his walk away options. Thus, under such guidance, you
should approach a non-ideal but accommodative licensee before you prospect the ideal licensee.
The logic being that you can secure a walk away option when generating the interest of a
secondary licensee which can be parlayed into leverage when negotiating with the ideal target
licensee.

Licensees often place a higher value on a technology when their competitors stand to be deprived
of it. While it is usually prudent to develop walk away points, there are some risks when
applying this sequencing strategy in the world of licensing. Trying to bait an impulsive response
on the part of a large organization with its intricate approval process is more likely to backfire
than to yield results. If an assignee says that other large companies are interested, the solicited
company can say that such interest is immaterial and that they have their own independent
metrics and methodologies to determine which technologies and royalty rates are appropriate for
them. Large companies are inundated with solicitations to license technology. It is easier for
them to reject a licensing opportunity than to pursue it. They have their own processes for vetting
technology and their employees do not typically feel the same sense of urgency for executing a
deal as do the inventors. In fact, when an investor bluffs by alluding to interest in their
technology on the part of other potential licensees, they could derail the negotiations. This is
because executives at big companies don’t want to waste time working on deals that might get
snatched away.

Preparation for Initial Negotiating Rounds

A crucial step to take before negotiating is to coordinate your firm’s objectives and goals of the
negotiations. It is imperative that everyone from your team is reading from the same script
otherwise you stand to be sabotaged by your own colleagues. It is often wise to make sure that
you understand what your boss expects from the negotiations. For instance, I recently had a
client who was highly confident that he could quickly close a relatively small license agreement.
There was also a small chance of closing a major agreement further into the future. It accrued to
his benefit to ask his boss which was more important to the organization: a high certainty of
near-term revenues or waiting a few quarters to try to close a deal several magnitudes of orders
larger.

In preparing for the initial negotiations, you should conduct competitive intelligence to ascertain
the motivations, desires, pressures, and limitations that your adversaries have with regard to their
licensing programs. The following are among the answers that you should seek when conducting
your due diligence:

 What are the company’s licensing goals? How much pressure are the company’s
executives under to meet these goals? How important is your deal to the careers of the
executives you are negotiating with?
 What is the importance of timing for concluding licensing deals? Can more favorable
deals be completed before quarter or annual end?
  What are the company’s accounting considerations? Do they prefer to expense or
amortize IP related expenditures? (Royalties are paid out of cost of sales whereas upfront
fees can be amortized over the life of the )
 How are decisions made at the target licensee? By the relevant business division or a
holding company that manages all of the firm’s IP initiatives?
One method to accelerate the decision making on the part of a large company is to be very well
organized in your dealings with such companies. I recommend to clients that they should ask
their counterparts volleys of questions regarding how, when, and to whom information should be
submitted. The better you understand the potential licensee’s process, the more you can push
forward your license agreement.

The more data and corroborating reports you can present to support your contentions the more
convincing your arguments will become. Thus, you may want to have a strong opinion letter
prepared before your meetings with licensees. Richard Woodbridge, Partner with Fox Rothschild
in Princeton, NJ, suggests having your technology validated by a third-party organization such
the Wisconsin Innovation Service Center. You should have your financial modeling audited by
an independent valuation firm such as IncreMental Advantage. Being well organized with all of
the documentation at your disposal makes it easier for licensing professionals on the opposite
side of the table to work with you. A side benefit of being well organized is that doing so lends
credibility to your assertion that you are in conversations with other organizations. (If you claim
that other large companies are considering licensing in your technology and your documents are
not well organized, the other side will detect your bluff.)

The Opening Round

Generally, the licensee will allow the inventor to begin the dialog. Allowing the inventor to
discuss the technology educates the inventor. Further, allowing the inventor to discuss the merits
of his technology and present his financial forecasts allows the licensee to poke holes in the
inventor’s arguments. From the licensee’s perspective it is important to cut the inventor off if his
projections are far beyond those of the licensee. Merely allowing the inventor to continue
discussing his unrealistic expectations lends credibility to such expectations. Licensees often
articulate their walk away ability by mentioning that they have lots of talented engineers and
scientists on staff who could design around the patented invention. Retorts to this credible
negotiating gambit include:

 There are risks that the licensee my not be able to execute on their design-around
initiatives
 The costs for the licensee to design-around can ultimately exceed their estimates
 Even if the licensee can develop an alternative to the technology under discussion, the
licensee will experience delay in serving its intended
 In fast moving industries, the licensee may miss a few product cycles if it delays its
market
When your lawyer should become involved

There is some debate about how early in the negotiations lawyers should become involved. The
general rule of thumb is that the more experienced the primary business players are, the longer
they can wait to involve their lawyers. John Goldschmidt, Partner at Dilworth Paxson in
Philadelphia, PA, believes that lawyers should be involved in the initial discussions. There are
good reasons for this. First, lawyers represent a form of legal validation, can put the patent in
play, as well as substantiate the principal’s sincerity in seeing a deal through to
fruition. Second, document drafting is often easier when an attorney has the benefit of
participating in negotiations and understands the positions of both sides. A further refinement to
this contention is that a translation problem often arises when the royalty calculations are
discussed in the context of spreadsheets and decision trees and are then expected to be translated
into contract language. It is thus prudent for the lawyer to at least observe the discussions that the
finance and/or business people are conducting.

Third, an unsophisticated potential licensor can unknowingly place himself into jeopardy. For
instance, let’s assume an assignee has a patent with 10 independent claims and the patentee will
endeavor to reach 10 different license agreements. If one of the potential licensees believes it is
threatened by the assignee in one of the initial discussions, it can move to sue the patentee. If the
potential licensee invalidates the patent, not only will the licensor forfeit a licensing agreement
with the litigious potential licensee, but it will be prevented from pursuing license agreements
with the remaining nine targeted licensees. What complicates this scenario further is that there is
no definitive, static definition of what constitutes a threat.

NDAs and Memoranda of Understanding

The first legal documents that the licensor and licensee will consider presenting to one another
are Non-Disclosure Agreements and Memoranda of Understanding. Licensors must divulge
enough information about their technologies to interest licensees. Since licensors have a
legitimate concern that their disclosures could be stolen by unethical licensees, it is
understandable that they would request potential licensees to sign NDAs. However, licensees are
often reluctant to sign NDAs because they may already be pursuing similar technology; they do
not want to preclude another inventor from approaching them with a similar idea in the future;
and, the idea might already be in the public domain. When large companies execute NDAs, such
agreements are typically emasculated. In some cases having a licensee sign a NDA can be worse
than no agreement as the non-disclosure can apply to the licensor but not to the licensee.

One benefit for a licensor in requesting a licensee to execute a Letter of Intent or Memoranda of
Understanding is to determine the degree of sincerity that exists on the part of the licensee. There
typically exists asymmetry in the sensitivity towards time in negotiating licenses. While the
licensing professional from the large company usually receives a paycheck every week, the
inventor may not. If the licensee refuses to sign a MOU without a legitimate reason, the licensor
would have an indication that a deal cannot be struck with this potential licensee.

Despite this gating mechanism afforded by MOUs, there are several concerns with MOUs. First,
as MOUs are contracts and therefore subject to state contract law, the enforceability of MOUs is
not a certainty. Second, negotiators can handicap their own negotiating strategy by signing off on
MOUs prematurely: they may be tied to terms that they object to and only come to this
realization later in the negotiations when more information is elicited.
General Negotiating Techniques

The best negotiators do not view obtaining a signature on a license agreement as the ultimate
goal of the negotiations. Rather, they view a long-term, lucrative relationship with the other side
as the primary objective of the negotiations. Thus, the best negotiators adhere to the following
best practices of negotiations:

 You must create value before you allocate value. Thus, you must learn as much as
possible about the true motivations and needs of the other You should put as many issues
on the table as possible so that you have more needs that you can satisfy during the deal
structuring process.
 You should be hard on the problems that arise during negotiations but soft on the people
You may have to work with these people in one capacity or another in the future.
 You should set deadlines for resolving various pieces of the Parties that cannot meet
deadline requirements will not commit to reaching an agreement.
 You should realize that negotiating is analogous to When selecting a mate you can not
create a perfect partner by creating a collage of all of the best features from all of the
people you have dated before. Rather, you must select from what exists. No one licensee
will offer all of the most favorable terms that a collection of potential licensees promise
to grant. Nonetheless, licensors have to select the best licensee from the pool of licensees
that exist.
Negotiating Practices for Licensors

Licensors often find themselves negotiating against potential licensees who are much more
experienced in the art of negotiating and who hail from very large organizations. Here are a few
bits of advice to inventors who must negotiate against giants:

 Bring an Enforcer Inventors should not participate in the initial negotiations Bringing an
experienced business person will help the inventor gain a deeper understanding of what
the licensee’s intentions are for the given technology. Another valuable role of the
inventor’s colleague is to act as an enforcer. It is more difficult for the licensee to renege
on its promises when several people can recall them.
 Responding to SOPs Gambits Representatives from large companies often claim that
they are only authorized to make narrowly proscribed proposals because of the standard
operating procedures that exist at their companies. Licensors can refute these assertions
by finding examples of licenses the company has entered into that do not conform to such
Another method is to illuminate how such standard operating procedures contradict
relevant laws, regulations, policies, codes of conduct, organizational charters or
constitutions, established practices, precedents, expert opinions, principles or logic.
 Remove Valuable Players from Their Team Inventors may be able to handicap a much
larger company’s negotiating team by removing one of their This can often be
accomplished by pointing out potential conflicts or risks associated with such negotiator
remaining on the team. For instance, if an executive was recently recruited from a
company pursuing a technology similar to that being negotiated, the executive may be
violating a non-compete or non-disclosure agreement.
Deal Structuring Options
There are a near infinite number of ways that licensing agreements can be structured. The fact
that an almost imponderable number of permutations are available in negotiating licenses should
be embraced because these options can be used to craft a deal more favorable to both sides.
Below are a few tools that practioners can use to structure mutually beneficial license
agreements:

 Step-Up Royalty Rates Step-up royalty rates allow a licensee to pay low royalty rates
early in the agreement and higher rates later in the agreement or subject to a triggering
event (e.g. a specified level of production). The benefit to licensees is that they are
relieved of paying higher royalty rates when they are incurring start-up costs and ramping
up
 Step-Down Royalty Rates Step-down royalty rates allow licensees to pay a declining
royalty rate as they ramp up production of products incorporating the licensed
technology. Step-down royalty rates incentivize the licensee to aggressively
commercialize their licensed technologies.
 Minimum Royalties Requiring licensees to pay minimum royalties encourages the
licensee to refrain from allowing the technology to Also, if the minimum requirements
are equitable, the licensee may believe it is not worth trying to design around the licensed
technology.
 Creditable Payments One method to incentivize the licensee to rapidly commercialize
the licensor’s technology and to obtain a more attractive royalty rate is to state that initial
fees and milestones are creditable against future License agreements can also stipulate
that the fees that the licensee expends maintaining the licensors patent prosecution
program are creditable against future royalties.
 Royalty Stacking Competition requires that licensees consistently add enhanced features
to their Thus, licensees often must license in more and more technology to remain
competitive. If licensees were to maintain royalty payments for older technology at
negotiated rates while licensing in new technology, they would bear loses. Thus, many
licensees insist on royalty stacking provisions. These provisions hold that as the licensee
executes new license agreements, it can reduce royalty rates on previous agreements by a
specified percentage.
For instance, assume that two years ago licensee XYZ agreed to pay licensor A an 8% royalty.
Let’s also assume that the royalty stacking provision allowed licensee XYZ to reduce its royalty
payments to licensor A by 50% of its future royalty obligations. Thus, if licensee XYZ agreed to
pay licensor B a 4% royalty in the current year, licensee XYZ would be able to reduce its royalty
rate to licensor A to 6% ((8%- (50% x 4). There are typically floors that address the extent to
which royalty reductions can fall. Further, the royalty relief can be applied to other stipulations
in the license agreement such as the milestone payments that the licensee is obligated to pay to
the licensor.

 Grant Backs Grant backs occur when the licensor is granted access to the improvements
that its licensees make to the licensed There are three main types of grant back
provisions. First, “assignment” grant back provisions require the assignment of any
improvement patent from the licensee to the licensor. Second, “exclusive” grant back
provisions provide the licensor an exclusive right to use or sublicense any patented
improvements, while the licensee retains only a non- exclusive right to practice the
 patented improvements. Third, “non-exclusive” grant backs allow the licensor to practice
the improvement, while the licensee retains title and all other rights.
Grant backs are usually not granted when a major company is the licensee and the licensor is a
small inventor. The reason is that the large company does not want to give the inventor a return
on its investment. While grant backs are granted to other large companies that enjoy negotiating
leverage, they are usually limited by specified fields of use restrictions. Interestingly, the use of
grant backs is highly circumscribed in Europe because the European Union’s anti-trust
authorities believe that grant backs are uncompetitive.

 Sublicensing Rights allowing a licensee to sublicense a technology may enable the

licensor to collect more In some situations a licensee possesses many more resources to
license a technology than an inventor. In these cases, the licensor may not charge a
license fee to the primary licensee. Rather the licensor expects to earn all of its royalties
from derivative sublicensees. Sublicenses present a method for licensees to demonstrate
their best efforts to monetize an inventor’s technology and meet minimum royalty
obligations.
A few concerns that inventors have with sublicensing include the licensee may not execute
sublicense agreements with its competitors, thereby depriving the licensor of royalties. Also, it is
important that the licensor have the rights to subject the second generation licensees to royalty
audits.

 Most Favored Nation License Most favored nation terms hold that a licensee will only
be required to remit royalties at the lowest rate that any other licensee is required to remit
Similarly, most favored nation clauses ensure a licensee that if the licensor licensees the
technology to another company, the imposed royalty rate will not be any less. One of the
risks for a licensor who is contemplating granting most favored nation status to a licensee
is that anti-trust complaints could be filed. A legitimate rebuttal to a request for MFN
status is that the initial licensees obtained their licenses when there was more risk in so
doing and they are therefore entitled to a lower royalty obligation.
 Cross Licensing Cross licensing takes place when two or more parties grant a license to
each other for the exploitation of the subject-matter claimed in one or more of the patents
each Parties to a cross licensing agreement enjoy more freedom to design products
covered by the others’ patents without provoking a patent infringement suit. Another
benefit of cross licensing is that companies can reduce their research expenditures since
they have less need to work around competitors patents. Some companies file patent
applications primarily to be able to cross license the resulting patents, as opposed to
trying to stop a competitor from bringing a product to market. However, cross licensing
erects barriers to entry. If the industry’s major players have all cross licensed patent
portfolios to each other, the new entrant would be forced to pay royalties to all its major
competitors.
 Intellectual Property Indemnity Insurance Purchasing some intellectual property
indemnity insurance provides a company negotiating For example, when a business
software company negotiates to sell its software to a large customer, the large customer
will typically want to be indemnified if it were to be accused of infringement. Usually
such indemnities are worthless. However, if the business software company can
 demonstrate that it has insurance that will stand behind the indemnity, it will have more
negotiating power.
 Fields of Use Licensors can manage the fields of use provisions by allowing the licensee
to enjoy broader to more restricted fields of For instance, the licensor may grant a broad
field of use with the right to retract fields if it presents a use to its licensee and the
licensee elects not to pursue it. On the contrary, a licensor may grant a narrow field of use
and give its licensee the right of first refusal on other uses.
 Combining Patent Licenses with Consulting Agreements There are several benefits to
combining patent licenses with tech transfer or consulting agreements. Noel Humphreys
of Connell Foley in Roseland, NJ uses such arrangements to incentivize the assignee to
become more active in commercializing the While a patent underlying a licensing
relationship stands the risk of being ruled invalid, know-how carries no invalidity risk.
Licensors can place confidentiality agreements on the transference of know-how. Having
a consultant agreement accompany the license makes using the licensor’s technology less
expensive than designing around it. Combining a consulting agreement with a license
agreement enables the licensee to extend the relationship until the conclusion of the
consulting contract. (Other methods of extending a license agreement is to include
inferior patents or patents approved in ancillary markets that terminate far longer in the
future that the primary patents. These agreements usually expire on the expiration of the
last patent.) A final benefit of attaching a consulting agreement with a license agreement
is that this practice can ameliorate the impact of the MedImmune ruling which makes it
easier for a licensee to sue a licensor in the process of trying to invalidate the patent.
John Goldschmidt from Dilworth Paxson makes another crucial point about patent-consulting
combinations. When a consultant is consulting on a project, more intellectual property is often
developed and it must be clear who has title to such IP. One way to handle this issue is to
execute a Development Agreement which determines who is entitled to the newly created
technology. These agreements often hold that title belongs to whoever contributed the most to
the new technology or whichever company is most involved with pursuing the type of
technology created. Another vehicle that John Goldschmidt uses is for both the licensor and
licensee to jointly set up a new entity that will own the technology. A final concern for extending
a deal too long based on know-how is that it may encounter anti-trust issues when the know-how
becomes widely known.

Definitions in License Agreement

The best negotiators think about compliance during the negotiations rather than leaving the issue
of contract compliance as an afterthought for someone else to look after. One crucial component
of compliance is to ensure that the agreement is clear. Even seemingly obvious terms should be
defined; trigger events should be clearly demarcated; and, examples of the accounting treatments
should be provided in the licensing agreements. Negotiators should not delude themselves into
thinking that the spirit of the contract will prevail: The principals that negotiated the licensing
agreement will not likely be part of the compliance efforts in the ensuing years. As I tell
attendees of my Negotiating Licenses for Maximum Returns course, everything becomes
ambiguous when there is enough money at stake.
A term as seemingly self-evident as “sales” can become highly ambiguous. The following are
areas of frequent dispute regarding what is deemed a sale for purposes of determining royalty
obligations:

 On which sales are royalties to be paid? When sales are for full price, suggested retail
price, discount prices (especially if the licensee may derive some other benefit in
exchange for giving a discount)?
 Should royalties be paid on free samples? Sales to developing countries? Sales to non-
profit organizations? Humanitarian sales?
 Are returned products still sales?
 Does it matter if the buyer is an affiliate versus arms-length end users? Which transfer
pricing rules apply? Does a sale occur when a licensee gives the product to affiliates in
return for a contribution to its research foundation?
 How do you account for bundled sales (i.e. the licensed item is sold together with other
items for a single price)?
 How do you account for component sales (i.e., the licensed item is sold as a component
of a larger item for a single price)?
 Should royalties be based on gross or net sales? Are royalties owed when the sale is
invoiced or when cash is received? Which deductions are allowed (e.g. delivery costs or
early-payment discounts)?
 Are royalties to be collected when the licensee receives an upfront payment from a
distributor as a result of having won an exclusive distribution franchise?
 Are there different royalty schedules for selling in different countries?
 Are large customers entitled to receive price breaks upon meeting certain volumes? Do
such price breaks reset every year?
 At what rate are currencies to be converted? Which dates are to be used for such
purposes?
 Is the licensor entitled to royalties based on minimum guarantees that the licensee
collects from sublicensees?
 Are royalties due when products are sold in countries in which the licensor has no patent
coverage? Is the country of manufacture determinative in these scenarios?
 How are interest and penalties on late or underpaid royalties to be calculated? Is the
interest rate to be simple or compound? What is the underpayment threshold which, when
triggered, requires the licensee to pay for the royalty audit?
 Assuming that royalties are to be calculated on an annual basis, what is annual? Is it a
calendar year or a defined rolling 12-month period?
Ensuring Compliance with License Agreement

A common practice to ensure compliance is to invoke royalty audits. Quite often, licensors
recover millions of dollars in underpayments when ordering an audit of their licensees.
Underpayments more often reflect the inability to account for all of the royalties due to the
licensee, rather than calculated deception. Also, lots of large companies overpay their royalties
because such royalties are not any one individual’s money. What often happens is that a division
controller who has been remitting payments to a licensee based on the production of a given
product for many years will continue doing so even when such product no longer incorporates
the licensor’s technology. On the other hand, better managed companies require business
division managers to sign off on royalty payments.

Caution must be taken when initiating a royalty audit. According to our research, as many as
20% of royalty audits result in findings that the licensee has overpaid the licensor and as a result
the licensor must refund the licensee. Another concern with executing royalty audits is that local
laws in foreign countries may hinder what can be discover in terms of contested audits of royalty
records. The following are a few ideas for managing the issue of royalty audits:

 Early in the negotiations phase, there should be some discussion of the accounting
systems and practices that the licensee The calculation of the royalties should conform—
to some extent—with the ability of the licensee to track their royalty obligations. There is
no sense in negotiating an agreement and drafting a license that can’t be enforced.
 It is highly recommended that royalty audits be conducted early—when disputes result
from matters of interpretation—rather than several years into the license agreement when
the dollar values are too Thus, one recommendation is to write into the agreement that
there will be an audit after the first year of the execution of the agreement and that the
cost of such audit will be borne equally between the licensee and licensor. This
establishes a firm methodology for royalty accounting from the outset of the relationship.
However, the implication that there may not be further royalty audits in quick succession
may mean that the licensee will begin gaming the system after the first audit.
 Some licensors require their licensees to include a royalty audit as a component of their
annual accounting While the auditors hired by the licensee may not be as aggressive in
finding indicia of underpaid royalties (since the royalty auditors retained by the licensors
are compensated on the commission basis), this is a means to ensure some level of
compliance. This method is further well-suited when licensors do not want to become too
aggressive in their royalty audit demands because of other business interests between the
two companies.
There are other means by which a licensor can gain visibility into how the licensee’s business
operates. For instance, when the licensor sells other components to a licensee, it can quickly
determine how much product the licensee is selling, and by implication, the extent of the
royalties they should be remitting.

Joint Venture

Drafting International Joint Ventures Contracts requires a five-step methodology in order to

negotiate them successfully:
Step 1. Joint Venture mentality
The primary goal of Step 1 is to establish a partnership mentality. Both parties must make a
conscious effort to create an environment of trust; one in which they are transparent about their
high-level aspirations, specific goals and concerns.
Step 2. Co-create a shared vision and objectives
To keep expectations aligned in a complex and changing environment, both parties –nor just the
one with greater power – need to explain their vision and goals for the relationship.
Step 3. Adopt guiding principles
Value-eroding friction and shading occur because one or both parties feel unfairly treated. This
risk is highest when there are many unknowns about what will occur after the Joint Venture
contract is signed. In Step 3, parties commit to six guiding principles that contractually prohibit
opportunistic tit-for-tar moves.
The six principles are: reciprocity, autonomy, honesty, loyalty, equity and integrity. They form
the basis for all International Joint Venture Contracts using vested methodology and provide a
framework for resolving potential misalignments when unforeseen circumstances occur.
Step 4. Align expectations and interests
Having set the foundation for the relationship in the first three steps, parties hammer out the
terms of the Joint Venture Contract. It is crucial that all terms and conditions of the formal
relationship contract are aligned with the guiding principles. With the right mindset, the
development of the Joint Venture Contract becomes a joint problem-solving exercise rather than
an adversarial contest.
Step 5. Stay aligned
In this final step, contracting parties go beyond crafting the terms of the agreement and establish
governance mechanisms that are formally embedded in the contract.
This process should be part of the drafting of International Joint Ventures Contracts whose
objective is to govern highly complex relationships that demand collaboration and demand.
During negotiations: Understand and test bottom lines

After both sides understand the capabilities each party could bring to the table, negotiations can
move to the initial offer. In my experience, it doesn’t matter which party makes the first offer
because most JV negotiations are back-and-forth exchanges of offers and counteroffers.

There may be exceptions to the ebb and flow of the lengthy process. In a case where a potential
partner is under a liquidity crunch, a request for the negotiation process to be sped up to
safeguard their financial viability while getting the best value out of a negotiation may occur.

During negotiations, it is very important to focus on the following:

Win-win value propositions. It is very important to treat potential JV partners as mid- to long-
term strategic partners. If negotiations include offers for financial support and technology
deployment at a certain entry price, it must be a win-win value proposition. JV partners’
constraints must be considered from their point of view to make it easier for them to “bite” the
offer and come to a mutual agreement.

However, if negotiations are based on one party extracting a lot more value at the expense of the
other, the negotiations are less likely to succeed. So how do you know whether an offer extracts
considerable value at the expense of the other? A simple test is to look at the other company’s
bottom line.

Let’s again use the example of a taxi company. Assume I offered to value taxi licences at the
prevailing market price and provide financial support and technology deployment to a potential
JV partner. After much deliberation, the target company countered that the taxi licences could be
either:
1. Valued at the market price if I cross-guarantee their related companies so that they could
continue obtaining bank loans; or
2. Valued at 40% above the market price.

At this point, it’s important to step back and ask, “What do I know about the potential JV partner
before and throughout the entire negotiation process?”

In my case, I realised I did not have sufficient information to decide on option 1 or 2. So, I
decided to ask the potential JV partner the reason behind its counteroffers. It became clear that
most of these taxi licences were mortgaged to banks and clean titles had to be obtained before
assets could be injected into the JV.

After understanding the potential JV partner’s bottom line, I discussed and debated extensively
with the management team. Eventually, we countered with an offer to pay for the taxi licences at
35% above the market value. This would enable the company to inject these taxi licences as
clean titles into the JV. It resulted in a win-win for both.

Leaving the door open even if talks fail. Many deals fall through because both parties fail to
agree on a mutually beneficial entry price. But that doesn’t mean it’s the end of the negotiations.

For instance, in a past negotiation I was involved in, a potential JV partner wanted certain assets
to be valued at 50% to 60% above market value. In terms of return on investment and payback
period, the deal did not make sense unless there were strategic nonfinancial reasons. To continue
the negotiations, a counteroffer was made, but the other party decided not to continue with JV
negotiations.

Instead of rejecting the potential partner, I realised it’s important to leave the door open, and
communicated that the valuation can always be revisited later. This leaves the door open for both
parties to reach out again in the case of future changes to the factors negotiated.

Mergers & Acquisitions

A merger is when two or more companies agree to join together on roughly equal terms.
An acquisition, on the other hand, is when one company buys another, and they both remain
separate entities. This is often known as 'the big fish eating the small fish.'
Negotiation is the mutual debate and structuring of the conditions of a transaction in order to
reach a settlement or agreement. Negotiation is the most critical step when it comes to mergers
and acquisitions. It is the stage where the deal either comes together with the way the negotiators
want it to or falls apart because their efforts have exhausted them. Negotiation is a lengthy
process that begins with the signing of a letter of intent and typically extends all the way to the
final stages of the transaction. Negotiations form the sole basis of a merger or acquisition. It is
the most significant and the most important foundation that sets the background for a letter of
intent to be formed.
The ultimate goal of negotiating a merger or acquisition is to negotiate a deal in which two
companies conclude a transaction that generates shareholder value for both the buyer and the
seller. While there are some small disputes in the early phases of the M&A process, the most
essential negotiations concern the proposed transaction’s value and terms.

Cooperation, transparency, and flexibility are the business characteristics that allow buyers and
sellers to receive what they want, or can fairly expect to get, out of a negotiation. Each party
comes to the table with a prioritised list of “musts” and “wants” that characterise their respective
negotiating positions. Because instant agreement on all points is uncommon, most corporations
or firms engaging in M&A negotiations focus first on areas of common ground and then move
on to the issues that will be more difficult to resolve.

This step is very important because both the parties want to get the best for their individual
companies or for themselves through such an agreement and this can be achieved only through
open and honest discussions. The parties aim at a win-win situation and hope for both the parties
to get the best out of the agreement as the parties will be merging or one party will be buying the
other’s assets. To maintain the confidence and trust required to close the agreement, it is
normally recommended that both sides display personal and business integrity at all times. A
substantial degree of collaboration and negotiation between the buyer and seller is required to
execute a successful transaction.

One of the most important uses of negotiation concerning an M&A is the terms specified in the
letter of intent. It is of utmost importance to discuss and agree upon the same terms before
documenting them. Therefore, negotiations play an important role in making sure that the parties
agree upon the same thing when they sign a letter of intent. Negotiating the letter of intent
reveals that there are numerous issues to resolve beyond the price before granting a buyer access
to the business’s inner workings and confidential information.

A well-written letter of intent will speed up the negotiation and documentation process involved
in a deal, increasing the likelihood of success. Therefore, negotiating terms and conditions in a
letter of intent are important in order to make further negotiations easier and to ensure the
process is streamlined, with the parties sailing on the same boat. It is also often advised to
negotiate any kind of term or conditions with the help of a neutral third party/ negotiator. This
neutral third party would make sure that both the parties would benefit equally from the
transaction and that the terms are not biased.

While a letter of intent can be very useful in facilitating a smooth negotiation, a poorly written
LOI may not only fail to deliver the promised benefits, but it may also cause hatred or distrust
between the parties. The commercial intent of parties and the negotiations in a merger or an
acquisition transaction play a very important role. It would not be wrong to call them the heart
and soul of an M&A agreement. It is the driving force behind the agreement and also the glue
that sticks together both the parties involved, thus facilitating greater benefits and satisfying
commercial intents, and fulfilling the dreams of both parties.