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How Struggling Businesses Can Renegotiate Rent

Executive Summary

This article outlines strategies every business owner should consider before speaking to their landlord to try to reduce rent expense, and how to treat this as a negotiation that takes both sides’ priorities and incentives into account. Among the strategies prescribed are to recognize your landlord’s incentives to accept a discounted payment or a deferred payment; to think long term in negotiations; and to set rent as a percentage of revenue (instead of a fixed payment), aligning tenant and landlord’s incentives and reducing tenant risk if businesses are once again shut down.

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Tens of millions of businesses around the world are currently struggling to cover their overheads, and most economic activity is being generated from people’s homes. This renders rent — for offices, entertainment/hospitality, non-food retail, and industrial spaces — a large but temporarily unnecessary cost item. The ability to manage it may be a key managerial skill for surviving the crisis. In this article, we cover the main points that every manager should consider before speaking to their landlord to try to reduce this expense and the main strategies that are likely to help both the landlord and the tenant. Finally, we note some likely consequences of these arrangements for future rental contracts.

Understand Your Landlord’s Position

The first step in a successful negotiations of rent payments is to understand the point of view of the landlord. While there are many different types of property investors who may own your business space, the most important features for negotiations are their cash position, attitude towards risk, and the ability to bear a rent reduction, as well as their contractual obligations.

Further Reading

For instance, real estate is a popular investment asset for pension funds because it traditionally provides a steady income useful in meeting their liabilities. If your buildings are owned by a company like this that relies on income, their priority might be to see some payments (even partial ones) being made. In contrast, many buildings are owned by investors who need to periodically report the value of their assets and income return (e.g. investment funds). Their priority is to report good performance, and they are more concerned with the overall level of payments than their timeliness. They may be less willing to offer a discount but more likely to accept a deferral. Also, these owners are in a difficult position because it is impossible to value properties at the moment, so they do not know how much their assets have lost in capital value. This puts them under pressure to manage income return the best they can.

Other owners have different priorities. Family offices who are focused on the long term may be most flexible in dealing with tenants to keep the in properties; in contrast, some property developers have much more of a short-term perspective. Knowing who owns your building and what their priorities are will help you prepare a good negotiation strategy.

Propose a Solution

If your business is in survival mode, you may not be able to pay your rent and should try to renegotiate the existing lease. We recommend that you approach your landlord with a proposed solution rather than simply stopping the payments. This gives you more options and reduces the risks you will face when the current crisis eases.

In preparing an offer for your landlord you may want to consider the below points:

Think long term: There are several parameters of your lease you can probably alter today that will not require any cash from you but will have value to your landlord. If you are a good tenant (in normal times), extending the lease for a longer term could be an attractive proposition to property owners who are worried about increasing vacancy rates in the coming years, especially if the recession proves to be a long one. A good example of this are hotels, which at the moment generate no income but have sustainable business models that rely on the properties they operate in. Extending the lease with a good hotel operator may be an opportunity for the landlord to secure a good tenant who will stay in place, avoiding the risk of an empty property during the recession.

It may also be possible to alter the covenants of the lease or remove some clauses that list the reasons the tenant can break the lease, which serves to reduce the risk to the landlord. Naturally, this limits the tenant’s flexibility in the future, but the present value of this flexibility to you is probably low if you are in survival mode. If you go out of business, it will cost you nothing. In fact, renegotiating your lease in this way does not affect your balance sheet, so it might be a good way to reduce your costs without affecting your credit or working capital.

Share the risk and the reward: Another incentive you can give your landlord is to offer them a different financial reward for allowing you to delay or waive your current rent payments. It can take the form of interest on the deferred rent or an income-sharing arrangement. A good example of the latter is to make the rent a percentage of the tenant’s revenue.  (In countries where “revenue” is known as “turnover,” this is called “turnover rent.”) This ensures that the tenant has enough cash to pay and that the payment is proportional to what they earn. Both differed rental payments with interest and turnover rents tie the payoff of the landlord directly to your future performance. Not only you will be able to defer any payments, but you can considerably increase the incentive your landlord has to help you stay in business.

This approach is commonly used in shopping centers where anchor tenants have a big influence on the value of the property. Turnover rents align the incentives of landlords and tenants and can be used in office and industrial properties, too.

Be entrepreneurial: Many established businesses are now in the position usually reserved for start-ups; they are cash poor but have the potential to generate income in the future. This means that they can use structures and ideas from the private-equity world to keep their business going. This includes paying creditors in equity, sharing ownership of assets, or perhaps even sharing intellectual property rights. In many cases this is an extreme version of turnover rent, where the tenant enters into a partnership with the landlord. This was relatively popular in the last financial crisis when many businesses that struggled with paying back their loans offered their banks equity instead of cash. These deals often turned out to be very lucrative for the banks.

Know what game you are playing: Some landlords are contractually obliged to enforce the lease agreements to the letter. If that is the case for your landlord, there is very little you can do to stop legal proceedings. However, because many courthouses are closed at the moment, enforcing legal rights and obligations may not be easy. This reduces the value of the “best alternative to negotiated agreement” (BATNA) for the landlords.

Your strategy should be reduce this value as much as possible to bring the landlord to the negotiating table. You should speak to your legal team about how to do this formally, and together you should look closely at the lease agreement when considering alternatives. Many chain brands — including such as Adidas in Germany, Burger King in the U.K. or Staples in the U.S. — have publicly announced that they will not pay rent. This created a very public debate about whether retailers or landlords should bear the pain of the shutdown — and it is likely a calculated strategy designed to force their landlords to negotiate.

Regardless of whether your landlord is able to work with you or not, talking to them will help if you are facing difficulties. Negotiations reduce information asymmetry. Even in a conflict, negotiations will help establish what risk you are facing and which lines the other party is not willing to cross. Information is critical to understanding and managing priorities and payoffs on both sides of the table. However, negations also help understand the motivation of the other party. For example, many landlords are worried that opportunistic tenants who do not need help will try to take advantage of the current situation and ask for rent reductions. Convincing your landlord that this is not the case for you is a good starting point for a discussion.

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Controlling the Emotion of Negotiation

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Two siblings, Thomas and Sally Campbell, are faced with selling their childhood home. They need to make several difficult decisions, all the while navigating their contentious relationship. Harvard Business School professor Leslie John discusses the importance of asking ( …

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How to Negotiate with a Procurement Team

Executive Summary

Service providers often feel frustrated when they are funneled into a procurement process to win deals with clients. Their choice, as they see it, is either to walk away, or capitulate to procurement’s rules, thus losing the opportunity for potentially significant value creation (and future profit). They  enter a predicament called “winning the pitch but losing the negotiation.” But it doesn’t have to be this way. Rather than deciding how to respond to ultimata and threats, sellers can instead use two key moves to improve their fortunes: Analyze the set-up and shape the process.

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Imagine the feeling: after months of courting a new client, who has given every indication that a lucrative contract award is imminent, you receive an email from their procurement team. The letter states that there will be a competitive bidding process; that all bidders must agree up-front to standard (onerous) terms and conditions, and that any attempt to speak directly with the client will result in expulsion from the process.

This unsettling scenario is increasingly familiar to many sellers – and most assume that negotiating is more or less futile. Their choice, as they see it, is either to walk away, or capitulate to procurement’s game rules, thus losing the opportunity for potentially significant value creation (and future profit). They are about to enter a predicament we call “winning the pitch but losing the negotiation.”

Over the last several decades, we have coached and trained both buyers and sellers through many similar situations. We have seen buyers waste time and money by structuring pitches in ways that destroy value – and sellers lose time, money, and emotional balance by navigating those processes naively.

But it doesn’t have to be this way. Rather than deciding how to respond to ultimata and threats, sellers can instead use two key moves to improve their fortunes.

Analyze the set-up.  Imagining how one’s counterpart views a negotiation leads to more valuable outcomes for both parties. Unfortunately, sellers are usually in the dark about the assumptions and habits of procurement professionals. They assume that a competitive pitch process has been carefully thought through and that it reflects the client’s true priorities; in fact, this is often not the case. Procurement teams often default to a tightly controlled and highly leveraged competitive pitch process because it is easier to administer than trying to negotiate across complex internal stakeholders and multiple suppliers simultaneously. Moreover, procurement leaders are often incentivized by short-term metrics that encourage a simple zero-sum negotiation mentality and foster a control-oriented process mindset.

Sellers also mistakenly assume that procurement departments have the authority to impose process rules and requirements. Ask a Chief Procurement Officer how much actual decision-making power procurement has in a typical organisation and the answer is: “surprisingly little.” Indeed, procurement is rarely the final decision maker, no matter what they may tell sellers.

To assess the decision process, it’s helpful to think in terms of the deal’s “DNA,” a term we use to differentiate:

  • Decision owners (who actually approves or can block the final decision?)
  • Negotiators – or negotiation process setters (like procurement)
  • Advocates/Advisors (who have a stake in the outcome and/or might shape the decision criteria) or process.

Sellers should ask process-setters how the ultimate decision will be made and who will be involved, but should also treat the assertion of decision ownership by procurement as a hypothesis to be tested, rather than the settled truth.

Sellers should also work to understand the buyer’s key business requirements and how they were developed. If the Request for Proposal (RFP) already includes a set of business requirements, ask questions to clarify where the requirements came from and whether they truly capture the scope of value in the client’s mind. If no business requirements have been provided, ask for them. Sellers should seek to understand from buyers how they have understood the interests (goals and concerns) of varied internal stakeholders – each of whom may believe that their needs are most important. Asking procurement about the thinking that went into business requirements can sometimes lead to invaluable conversations and insights about what is truly most important to the internal client(s), and why.

Finally, sellers should think carefully about whether the stated business requirements accurately reflect all key client interests. An RFP may omit key client interests when procurement fears that naming them might give away leverage (sharing a desire make a decision quickly, for example).  There are also typically psychological and organizational interests in play: buyers typically want to be treated with respect, be seen by their internal clients as having done a good job, and avoid feeling exposed for lacking technical or market knowledge. Since meeting unstated interests can sometimes profoundly influence both process and outcomes, sellers are wise to craft solutions and deploy communication tactics that anticipate and meet both unstated interests and stated business requirements.

Shape the Process

Having worked to understand the set-up, sellers can almost always find opportunities to politely challenge, disrupt, and change the rules of a competitive pitch. Power in negotiation comes from many different sources—the strength of each side’s no-deal alternatives; the current or future dependence of one party on another; the power of a uniquely responsive solution; the power of precedents, criteria and benchmarks; the power to shape the other party’s future reputation or opportunities, and so on. Facing many competitors doesn’t rob each seller of all power.

Moreover, power is almost always dynamic during a pitch process. A seller can often find leverage at the precise moment when they are about to enter into a pitch, particularly in situations where their inclusion is desirable to the client (e.g., an incumbent seller, or one with whom the decision maker has worked before).  Suppose, for example, that procurement’s RFP attaches a standard supply contract containing onerous, one-sided legal terms and conditions (extended payment terms, unlimited liability provisions, uncapped consequential losses, claims of ownership to all intellectual property, etc.). Faced with losing a highly valued seller who is not prepared to accept the unreasonable contract clauses, a buyer will often make process concessions to that seller, or to all sellers.

 As a pitch progresses, the buyer may provide templates and spreadsheets that must be completed in a very specific and restrictive way (sometimes defined by a narrow or incomplete description of the true business problem). Sellers may be told that failure to comply within the response format will lead to disqualification from the pitch. While designed to help procurement to compare responses more easily, such restrictions can hinder the proposal of value-creating solutions, and sellers can consider three politely disruptive moves, emphasizing why they might help the buyer to realize greater value:

  • Re-imagining the business problem: a seller can fill out the template, while also challenging the premise of the business problem that the buyer has described in the RFP, and providing a supplemental, separate response to the problem they believe the client really cares about.
  • Offering multiple packages: a seller can provide one response using the format required and provide several other proposals that might vary scope, staffing, price points, and incentive or compensation models. Providing MESOs – multiple equivalent simultaneous offers – is an effective way for sellers to demonstrate creativity and effort in solving problems, to provide a context for the relationship between price and value, and to uncover true buyer preferences.
  • Bypassing communication restrictions: while this move must be considered carefully, bypassing unreasonable communication restrictions – by speaking to the client directly or cc’ing the client or decision owner in a summary of understanding, or a summary of what has been proposed and why – can sometimes help to clarify what is actually most important in a solution, or whether a requirement is truly critical.

 Toward the end of the pitch process buyers typically narrow the field to a short-list, seeking to maintain leverage by using aggressive process tactics. They may run eAuctions where price is isolated from all other issues; or set time deadlines by which final prices must be submitted. This is a moment in the process when sellers are most at risk; because the sunk costs of pitching, internal leadership expectations and pressure, and the possibility of winning can lead to significant and unilateral concessions.

At these moments, sellers must remain disciplined. While remaining confident in their ability to create value for the buyer, they can also keep their cool by remembering that, at this late stage, it is highly likely that buyers have already identified a winner and are merely using the other sellers as leverage to improve on price and terms. This is particularly the case when the purchase is complex and the scope of value to the buyer of finding the optimal solution is high.

Rather than following passively, sellers can proactively shape the endgame through three moves. First, sellers can propose a period of exclusive negotiation in which the interests on both sides can be fully explored, and options enhanced and re-packaged. Second, they can employ deadlines – a time by which a proposal must be accepted, or by which an award decision must be made – after which the seller withdraws from the pitch. Finally, after the buyer announces that the work has been awarded, but before legal contracts have been agreed, sellers can hold back delivery of products or services until key contract terms have been agreed.

A Fresh Approach Sellers often bemoan the tactics and constraints imposed on them in competitive pitches.  But procurement isn’t going to disappear as a function any time soon, nor should it. While we can hope that procurement professionals work to enhance pitch processes, sellers must learn in the meantime to be more proactive participants in approaching, navigating and shaping competitive pitches in ways that promote mutual gains – rather than pyrrhic victories – for themselves and their clients.

Source: HBR.org

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Research: How to Build Trust with Business Partners from Other Cultures

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Trust is the social glue that holds business relationships together. Business partners who trust each other spend less time and energy protecting themselves from being exploited, and both sides achieve better economic outcomes in negotiations. But, how do managers decide whether to trust a potential partner outside of their business? And how does culture influence this decision-making process?

To answer these questions, we interviewed 82 managers from 33 different nations in four regions of the world identified by the World Bank as the engines of the global economy: East Asia, the Middle East and South Asia, North America and Europe, and Latin America. These managers were diverse in terms of gender and age, and they represented various industries and business functions.

We asked them, “How do people in your culture determine if a potential business partner is trustworthy?” Their answers revealed systematic cultural differences in how trustworthiness is judged that have implications for how managers should approach these partnerships. Our findings have been published in The International Journal of Conflict Management.

Although not everyone in a cultural region determines trustworthiness in the same way, the cultural similarities and differences we observed led us to several conclusions, building on the previous work of one of us (Jeanne). The variations we observed — in both the criteria that managers used to assess trustworthiness and the way they collected information to make that assessment — are associated with two cultural factors. The first factor is how much people in that culture are willing to trust strangers in everyday social interactions. The second is what’s called cultural tightness-looseness, which is the extent to which social behavior is closely monitored in a particular culture and violations of social norms are sanctioned.

Here is an overview of what we found in each region. Further below we discuss what this means for managers looking to build business partnerships across cultures.

North American and European Cultures: Openness

Managers from Western cultures told us they generally assumed a potential new business partner would be trustworthy. For example, one respondent from the U.S. said, “We operate under the principle [that] everyone can be trusted until proven otherwise.” Another person from Italy said something similar: “We tend to believe that people are trustworthy.”

Nevertheless, managers in this region also tested those assumptions; “trust but verify,” as one U.S. respondent told us. They did so primarily by evaluating the potential partner’s behavior at the negotiation table: “See if [the] person is forthcoming; ask a question you know the answer to,” a U.S. manager advised. A respondent from Germany explained, “If you have someone who’s pretty open to you, who shares a lot of information, I think it feels like he’s trusting in you, so you trust in him. … If it’s only give, and there’s no take, or if there’s only a take from his side and no give, then it’s not a fair dialogue.”

Managers in Western culture do not rely on a social relationship to ensure trust — in fact, it’s just the opposite. “It doesn’t matter how nice the people are, or how much you like them. If they don’t have enough business, they don’t have enough business,” a respondent from the U.S. said. An Italian manager explained: “You have to separate the personal relationship from the work.”

East Asian Cultures: Competency

East Asian managers described what amounted to a three-stage process to determine trustworthiness. First, they seek information about a potential business partner’s reputation. “In order to trust, we have to know the [person] first,” said a Korean manager. A favored way to do this is to rely on a third-party introduction, which we call “brokerage.” A Japanese respondent explained it this way: “If Mr. B introduces Mr. C to Mr. A, then Mr. A would trust Mr. C, because Mr. A trusts Mr. B. And Mr. A knows that if Mr. C performs very badly, then Mr. B will be very embarrassed, and the relationship between Mr. A and Mr. B gets very weak.”

Reputation, East Asian managers explained, is hard to establish, so people and companies with good reputations are intent on maintaining them.

Meeting the potential partner to test their competency is stage two of the trust-building process. Since it is difficult to explicitly say no in these cultures, East Asian managers seek to determine whether the potential partner can deliver the business. They explained:

“It’s not like [I’m] testing [whether] I trust you, [I’m] testing if you can do it.” — manager from China

“Chinese exaggerate so [you] have to check [them] out yourself. Focus on their capabilities.” — manager from China

“Sometimes people [say they can do] things [that] they cannot do. It’s a big mistake and you lose trust completely [in these people].” — manager from Japan

If the potential partner’s competency checks out, East Asian managers move to the third stage, where they engage in more social, relationship-building activities. A manager from Japan explained that they tend to socialize after the business meeting, so as not to do anything to upset the burgeoning relationship. “[Having a] business dinner after successful or important meetings is fairly typical,” they said.

Middle Eastern and South Asian Cultures: Respect

Respect is the primary criterion we found Middle Eastern and South Asian managers use to judge trustworthiness. Managers from these cultures explained that to expand their businesses they had to work with others who were not members of their immediate family, clan, or tribe. They understood that a potential business partner might not share their values, but they sought out people who at least respected their values. “Show[ing] that you respect their way of living can play a big role in smoothing the [beginning of the relationship],” as one manager from India told us.

Middle Eastern and South Asian managers said that they verify, before they trust. “It’s not, I trust, [then] I verify; it’s I verify first, then I trust,” said a manager from Lebanon.

As in East Asia, managers from this region research their potential partner’s reputation. One respondent from Palestine said, “I talk to other people in the community who might know this person, ask them about him [and] whether I should move forward or not.” This process might include brokerage: “I try to always build [a] personal relationship with my clients. They don’t always become friends, but … when they introduce me to potential clients, my potential clients trust me because there’s someone in the middle [whom they] trust,” said a manager from Turkey.

Negative information at this stage of the process is a signal to move on, but positive information then needs to be confirmed. “You should double-check or ask more than one person…” a manager from Kuwait cautioned.

The final judgment of trustworthiness in this region often comes after a series of social engagements that provide an opportunity to assess respect:

“People go [to] … dinners. … They have a couple [of] drinks. They talk about stuff, life and everything. So they try to get to know each other’s character, and so … decide there whether to trust that person or not.” — manager from Turkey

“We like hospitality, so you should show some generosity, so people feel that … you’re willing to give.” — manager from Saudi Arabia

Latin American Cultures: Similar Values

In Latin American cultures, the social relationship comes first, and the business after. Shared values are the primary criteria for judging trustworthiness:

“Find out if (they) have same values as you do.” — manager from Brazil

“They trust me because they think that I am similar to them.” — manager from Colombia

“If you perceive that there are values that are not shared … that is where you decide [whether] things can continue … or [whether you’re] not really willing to have the next conversation.” — manager from Bolivia

Latin American managers rely on the opinions of others as a first step in determining the trustworthiness of a potential new business partner. The primary focus of managers in this region was weeding out those with poor reputations. A manager from Mexico told us, “If you heard one guy wants to make an alliance with you, and three or four former shareholders say that he’s very corrupt … I think that’s very, very important, because … if he stole from other guys, he will [probably] do it to you.”

Assessing shared values, however, required making a personal connection:

“Before negotiation, engage in social contact — no business talk.” — manager from Nicaragua

“[Small talk] in Latin America is very important…and a good way that we’ve found to do it is by sharing a meal. We try not to talk business. We just get to meet each other … see if we have things in common. Most of the times, we do.” — manager from Mexico

“When you get them talking about their family, about something that they like talking about … even if you try … you cannot hide yourself … for the whole two hours. There will be like five minutes where you’re going to show your true colors, right? That’s what you want to see. … Are they open? Are they transparent? Or are they shady? Are they suspicious? [You want to see] their true self, the one that you’re going to be working with.” — manager from Chile

What Explains the Differences?

The differences we observed are connected to cultural levels of trust and how “tight” or “loose” the culture is. Again, those terms refer to the extent to which social behavior is monitored and violations of social norms carry consequences.

How Do You Assess Trust with Potential Business Partners?

In North America or Europe: Recognize that the test for trustworthiness is openness and consistency at the negotiation table. Be prepared to share business-relevant information regarding priorities and the reasons behind them, and it’s fair to expect the same in return. Accept that a cordial social relationship is a benefit but not necessary for trust between business partners.

In East Asia: Ask someone who has worked with you and the other party to make an introduction. Be prepared to demonstrate your competency to deliver your end of the new business relationship, by showing examples or providing prototypes. Join in post-negotiation social events to celebrate the new relationship.

In the Middle East or South Asia: Understand that respect reigns. Actively seek opportunities to signal respect for differences in cultural norms. Offering or reciprocating hospitality is a good start.

In Latin America: Participate fully in social activities. Be prepared to be open about yourself, your interests and hobbies, and your family situation. Learn about the partner’s business and community, including their family and values, so that you can move the conversation beyond small talk.

Keep in mind that cultural differences are a matter of emphasis. For example, our findings do not imply that respect, which we found to be key in the Middle East and South Asian cultures, is altogether unimportant in Western culture; just that it is more important in Middle Eastern and South Asian cultures. Likewise, our research does not imply that every manager in every country in a region is going to approach the challenge of determining whether you are a trustworthy potential business partner exactly as we described. That said, understanding what is normative in a culture can give you useful information as you endeavor to build trust with counterparts in different parts of the world.

If you want to explore these concepts further and understand how they apply to you, you can join this simulation and webinar taught by Jeanne.

Source: HBR.org