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How to Avoid Zero Sum Thinking

In the business world, a major force in deal dynamics generated from fear is zero sum thinking — the notion that in any transaction, one party’s gain is, by definition, the other party’s loss. This basic premise forms a simplistic foundation for socialism and communism— the premise being that there is a fixed amount of wealth, so if one person has too little others must have too much. The only solution offered by these economic models is to redistribute the wealth from the haves to the have-nots. Capitalism, on the other hand, is based on the premise that people can create wealth through innovation and investment, a non-finite model of wealth and value. The best solution this system can provide is to create opportunities for everyone to become wealthier, or at least less poor.

I do not want to spark a debate over the pros and cons of either system, and I readily acknowledge that the above is very basic differentiation of the models. Perhaps we need a little of both — compassionate capitalism. However, I would like to generate a discussion over zero sum thinking, because I have witnessed its potential for creating discord in business as well as in personal relationships. Whenever we begin to think that someone else is gaining something at our expense, we feel as though we are being cheated. We can even begin to feel this way when we fear that what we stand to gain from a transaction is less than what the other party stands to gain, even when what we stand to gain is what we wanted all along. Oh, the injustice!Zero Sum ThinkingThe question becomes how do we respond in these situations? The typical response is to feel disappointed and perhaps even angry, but that brings us no closer to our objective of getting a fair deal, or the deal we had hoped for when the process started. There are better options to zero sum thinking.

Find the Value

If you begin to fear that someone else is gaining or is about to gain something at your expense, ask yourself:

  • What do I want and what do I stand to gain and lose?

In the many transactions in which I have been involved, I have noticed people often focus on only one thing —money or the current or future monetary value of whatever asset they are exchanging for money. However, transactions typically involve more value than what the money represents, as I point out in a previous post, “Top 5 Do’s When Negotiating the Sale of an Auto Dealership.”

For example, if you are selling your business, consider factors other than price, such as your legacy in the community and how you feel about the future wellbeing of your employees. You may find satisfaction selling for less to a buyer who plans to operate the business according to a certain set of principles or who agrees to take care of your former employees or hires you to run the business for a time. It may not be the highest offer, but it may be the best offer. What is important is that you consider everything you want — price and terms — so you have a clear idea of what you are willing to give up getting what you want.

Note: I am somewhat loathe to use the phrase, “give up” — because in many situations, what the other side wants may not be anything of value to you, so you’re not really giving anything up, per se, but instead are using your resources to facilitate a deal that makes sense to you.

Also consider your reasons, beyond the money and assets being exchanged, for conducting the transaction. For example, if you are selling your business, what do you plan to do with the money? Are you using it to retire? Do you plan to start another business, one that you have always dreamed of? Will you use the money to take care of a loved one? How much money do you need to finance your objectives? Having a clear idea of what you want the money for may make you more aware of the real value you are getting in exchange for your business.

If, on the other hand, you are buying a business, what are your reasons for wanting to own it? Do you want to be your own boss? Does the business have something that another business of yours needs in order to grow? Maybe you want the business to give your children and other family members decent paying jobs. When you begin to think about the reasons you are buying the business, you may realize what the business is really worth to you.

All of these reasons and others represent value beyond the money and goods changing hands in the transaction, and need to be part your decision. More importantly, these considerations help you to determine whether you will be satisfied or dissatisfied after closing the deal. At the end of the day, what really matters is whether the transaction delivers what you want, so you really need to understand what it is that you want.

Create Value

A thoughtful attorney practices both law and mediation. What’s the difference? Technically speaking, law generally focuses on distinguishing right from wrong and making all parties whole (a zero-sum approach). Mediation, on the other hand, generally seeks to address the needs and concerns of both parties. A skilled mediator can often find a solution by uncovering unexpressed needs and hidden fears and “creating value” to meet those needs and address those fears.

For example:

Suppose Bill is suing Tracy’s company for $1 million. Both agree to try to settle the matter outside court using a third-party attorney to serve as the mediator named Reese. Tracy tells Reese that her company admits responsibility for Bill’s loss, but that $1 million is far too much. Her company would reluctantly settle for $500,000, but she insists that Reese not disclose that amount to Bill.

Reese approaches Bill and asks, “Just out of curiosity, why $1 million?”

Bill responds, “Because I have always dreamt of owning a carwash, and that’s how much it will cost to get started.”

Reese’s face lights up, and she says, “Funny, I was just talking to a guy the other day who’s selling his carwash. Let me give him a call and see how much he’s asking for it.” She calls the owner of the carwash and finds out that he wants to retire and is willing to sell for $350,000. What luck!

Reese arranges for Bill to visit the carwash and have it inspected. He falls in love with it, and it passes inspection. It requires some updating, but Reese is as delighted as Bill is surprised that Bill can buy such a nice carwash for only $350,000.

Reese asks Bill again how much he would settle for. He thinks about it. He can buy the carwash he wants for $350,000, but it needs $50,000 to make it really nice, and he could use another $25,000 for a car. He says, “I’d be happy with $425,000.”

Reese calls Tracy and asks if her company would be willing to settle for $425,000. Tracy thinks that’s fair. Dispute resolved, and everyone’s happy.

How did Reese pull it off? By creating value. It was almost as though the mediator had created money out of thin air.

Attorneys do this all the time. They look for ways to create value. The key is communication and reflection. Find out what the other party really wants and why. Sometimes you can add value to a transaction without spending a dime.

Collaborate to Avoid Zero Sum Thinking

We often approach negotiation as adversarial. We want to win. Unfortunately, so does our adversary. If one of us succeeds, the other loses. We might come to a draw, but then both of us walk away disappointed, as if we missed an opportunity.

However, a deal is only good if it is good for both parties — when both parties win (even if the definition of win may be different for each party) — and the best approach to make that happen is to collaborate. Each party focuses not only on his or her own interests but also on the interests of the other party.

While it may sound contrary to typical business negotiations, some of the most successful negotiations I have seen and participated in have started when one party was willing to discuss their motivations for wanting to engage in the transaction (other than monetary value).  In one situation, a client was clearly very enthusiastic about acquiring several auto dealerships and was willing to pay what appeared to be a fair price in the market. The seller was less enthusiastic about the price, but was looking to sell to leave the market. The seller was afraid of leaving value “on the table” even though the purchase price was fair, as admitted by the seller.

My client broadened their thinking to raise the possibility of the seller retaining a minority position in the buying company. This allowed for an increased value to the transaction for both sides. The seller would be able to stay in the market passively while achieving his goals of leaving the market and getting paid. The buyer was able to lessen their initial capital commitment and enter the market and operate the business.

While there are variations on this theme in many transactions, it takes open minded, confident and non-afraid parties on both sides to engage in broader thinking on value and goals. While the parties may not have laid their fears and anxieties open to the other side, they were able to propose solutions that addressed those issues.

Keep in mind that collaboration in business deals can be very challenging. Collaboration works best when parties have shared interests and understandings. When the parties do not have shared interests, they have little motivation to work together, especially if they are unlikely to see one another after closing the deal.

Whenever you engage in a transaction or negotiation, especially one that begins to strike you as adversarial, ask yourself if you are falling into the trap of zero sum thinking. Is it possible that another approach would serve you better? Do the other parties involved seem open to the idea of creating value or collaborating to make the deal better for all involved?

Realize that the zero sum is not the only game in town.

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Disclaimer: The information in this blog post is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from Stephen Dietrich, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.
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About the Author: Stephen Dietrich is an attorney and author who has a passionate interest in the human side of business. His distinctive combination of legal and business knowledge, human insight, and dedication to clients makes him uniquely qualified to help corporate leaders and other C-level executives navigate high-value mergers and acquisitions, restructure transactions, and manage day-to-day operations. Through this blog, Stephen shares his extensive experience and unique personal and professional insights in the hope of stirring thought and dialogue that leads to ever deepening insights and understanding. For more information, please visit www.StephenDietrich.com.

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Comments (1)

  • Managing Emotions in Buy/Sell Negotiations - Stephen Dietrich

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    […] Frame the negotiation in your mind as a collaborative effort to reach an agreement that is in both parties’ best interests. Avoid approaching the negotiation as a zero sum game (for one party to gain something, the other must lose). See my previous post “How to Avoid Zero Sum Thinking.” […]

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