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Know When The Time Is Right To Renegotiate A Deal

by Marty Latz

“We’ve already negotiated the major elements of the deal, but the market just changed significantly. And we haven’t closed yet. How can we to go back and renegotiate our deal without significantly damaging our reputation?”

This question by a successful commercial real estate developer raises issues business professionals and lawyers should consider in any rapidly changing market.

So what should you do?

1. Consider the status of the negotiation.

Renegotiation means different things to different people, and its meaning may change depending on the status of the negotiation. Some business professionals and lawyers consider everything up for grabs until the deal is closed. In many cases, this is legally correct.

But just because you have the legal right to revisit a seemingly decided issue doesn’t mean it’s an effective move. And even if you don’t have the legal right to revisit an issue, the penalties you may have to pay by reopening it may be so minimal that it makes sense to raise it again.

Bottom line: The further into your negotiation and the more formally and legally conclusive the issue you want to renegotiate, the more likely your counterpart will aggressively resist the move and the higher the penalty you likely will pay in terms of your reputation and otherwise.

Let’s say I call up a property seller and offer to buy their property at the asking price. But five minutes later, before I put anything in writing, I call up again and say I have second thoughts. The negative impact here likely will be relatively minimal. But if I am two days from the close and make that same second call, it’s likely to be a much bigger problem.

2. Evaluate the renegotiation’s impact on your reputation.

Some individuals say you never should renegotiate anything given its negative impact on your reputation. The risk of being perceived as going back on your word, they say, is never worth it.

And in some industries and negotiation contexts, this is the right advice.

But in other industries and contexts, everyone understands that the initial deal is not the final deal.

In these circumstances, the negative impact on your reputation of reopening an issue likely will be minimal. This is especially true if you have explicitly discussed the fact that nothing is final until everything is final.

Of course, there often still will be a psychological perception that bringing up a seemingly closed issue may be inappropriate. But this needs to be weighed against the potential benefit of the renegotiation.

When my wife and I bought our current house, I initially negotiated with several mortgage brokers to find the best deal.

At the time, I told the broker with the best deal that we would go with her, but that if rates changed significantly before we closed, we would be back at the negotiating table.

In fact, rates did change significantly and I did renegotiate our deal. But it didn’t negatively affect my reputation, an extremely important consideration for me.

So explicitly consider the impact on your reputation in evaluating whether to reopen a negotiation. You don’t want a reputation in your industry for frequently going back to the table on closed issues.

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October 2007