Most of the blogs we have posted and the majority of the articles you read on the internet focus on negotiation between two parties. However, those of us that are regularly involved in the field of negotiation know that negotiators often have to deal with more than one party to reach a settlement. Harvard Business School Professor James Sebenius and Guhan Subramanian came to realize there was a lack of research on multiparty negotiations. Having studied real-world mergers involving billions of dollars, the Harvard professors believe they have one addition to make to multiparty contracts: deal protections.
Deal Protection for Sellers
The formal definition of a deal protection is “the extent to which the parties are bound to each other between signing and closing a deal.” Although a deal protection is often used during mergers and acquisitions, not many people outside the field know about it or use it. Many people also do not know the value of having a deal protection in place. Image you are selling your house and a buyer immediately falls in love with your property. However, unbeknown to you the buyer also has her eye on another house down the street. After careful consideration, she ends up making an offer on your house. You sign the purchase-and-sale agreement, but there is still time before the closing. Soon after you are under contract, you receive a much higher offer on your property from a different party. You reject the new offer thinking it is too late to do anything now. Is it really too late?
This scenario could have ended in a different way if you had negotiated a deal protection clause with a breakup fee in your contract. These two clauses would have said that you, as the owner, had the right to withdraw from the contract before closing if another buyer presented a more attractive offer. In order to ensure that the prospective buyer would remain interested in your house, you offer them a breakup fee of $25,000, which will be paid to them if you decided to not go through with the contract. Not only can the buyer consider the second house she was eyeing, but she gets an additional $25,000 for considering that house now. It’s a win-win situation for the buyer and the seller.
Deal Protection for Buyers
A deal protection can also be very useful for buyers. Let’s say you are looking to purchase a home and you find a property listed at $500,000. You think a more reasonable price for the house would be $450,000. As a buyer, you can offer a “loose” $450,000 deal, which would allow the seller to accept a better offer between signing and closing for the house. You can add a modest breakup fee if the contract does not go through because the seller received a higher offer.
Sebenius and Subramanian believe sophisticated deal structures create value by capitalizing on differing beliefs. Not only can these deal protections be useful for sellers, buyer can also feel more confident about their purchases. As shown with the example above, deal protections can be very useful in home-buying transactions. We hope this post has been informative and will help our readers with their future transactions in real estate and other fields.
Source referenced: Harvard Law Program on Negotiation