BATNA or Best Alternative to a Negotiated Agreement is the term that determines the alternative in case of failure of negotiation deal so as to keep the business going and save the business from unavoidable cost after proper evaluation of alternatives and negotiating the deal in the best possible way for the settlement.
The best Alternative to a Negotiated Agreement is the strategy that is to be prepared by any business organization before entering into a negotiation deal. It is done to determine the importance of negotiations and analyze the best possible alternative if negotiation fails. If the best possible alternative is available at a cost lower than the negotiated cost, then the buyer first tries to convince the seller to the maximum price the buyer is willing to pay. And the maximum price that the buyer agrees to pay is called Buyer’s BATNA. Similarly, the seller will analyze the minimum value of the negotiated deal before entering into negotiations. If the buyer offers the price lower than the deal’s minimum value analyzed by the buyer, then the chances of failure of negotiations are more. The minimum value analyzed by the seller is the sellers’ BATNA. The analysis of current and future situations, availability of Best possible alternatives as well as the valuationValuationDiscounted cash flow, comparable company analysis, comparable transaction comps, asset valuation, and sum of parts are the five methods for valuing a company. of deal entering into for negotiation are three basic components.
The Best Alternative to a Negotiated Agreement is developed by Roger Fisher and William Ury in the year 1981 through their book named “Getting to Yes; Negotiating without giving In.” In the book, they explain the concept of BATNA by explaining that it is the best possible next step if the negotiations failed and also the importance of analyzing the best possible alternative and alternate plan. Nash EquilibriumNash EquilibriumNash equilibrium is a game theory concept that helps in determining the optimum solution in a social situation (also referred to the as non-cooperative game), wherein the participants don’t have any incentive in changing their initial strategy. also explains the importance of negotiation when no alternative is available in the book named game theory.
Features of BATNA
- Aid in Determining the Importance of Negotiation: It helps determine the best alternative in case of an unsuccessful negotiation deal. If no alternative is available or the cost of the alternative is more than the current cost of the deal. Then it helps in determining the importance of the negotiation deal.
- Analyze the Best Alternative: It helps to analyze the best alternative from all the alternatives available to gain the maximum.
- Helps to Reduce the Unavoidable Cost: It also helps determine the maximum value the buyer can pay for the deal at which the best alternative is available for the buyer to cut the unnecessary, avoidable cost.
- Determines the Strategies for Negotiations: Best Alternative to a Negotiated Agreement also aids in determining the strategies for the negotiations to make the deal successful at the price beneficial for both buyer and seller.
Example of BATNA
Mr. John has decided to buy the second-hand car for which he went to the dealer to enquire about the price of the same. As per the dealer, the second-hand car which matches the requirements of Mr. John is available at $3,000. And the same car is offered at $2,500 by the colleague of Mr. John. The minimum price Mr. John is willing to pay is $2,400. So, buyer’s settlement range is between $2,400 – $2,500. And dealers in the future can sell the same car to another customer at a minimum of $2,450. Now, the buyer’s BATNA is $2,500, and the seller’s BATNA is $2,450. A negotiation deal is possible within the range, i.e., between $2,450 – $ 2,500.
For identifying the following steps and actions are necessary:
- List out all the strategies to make the negotiation possible.
- Determine the maximum cost if negotiation is favorable.
List out all the options available as Alternatives.
- Analyze the Best possible Alternative.
- Analyze the cost of the Best Possible Alternative and compare it with the maximum cost of negotiation.
- If the cost of the best possible alternative is lower than the maximum cost of negotiation, then the Best Alternative is said to be BATNA.
It is vital in business deals; the importance is explained as under:
- It helps to analyze every aspect of business deals and the maximum cost involved.
- Through BATNA, the unnecessary and avoidable business cost can be reduced.
- Explain the importance of negotiation deals and helps to determine the strategies to be used for negotiation.
- It helps to find out the additional negotiation methods if the cost of the Alternative is higher than the negotiation cost.
- Best Alternative to a Negotiated Agreement explains the importance of analyzing current and future situations.
- BATNA is used in many essential deals of business, like amalgamation and mergers.
- Best Alternative to a Negotiated Agreement is used for cost-effective benefit.
- It improves negotiation tact.
- It explains the importance of a backup plan.
- Determining BATNA help in improving the analyzing skills;
- Best Alternative to a Negotiated Agreement is useful for every type of organization.
- It ensures the business operations would not be affected in case of failure of a negotiation deal.
- Best Alternative to a Negotiated Agreement improves the efficiency of the business organizations.
- Analyzing BATNA increases the cost of business, like research and valuation costs.
- Determining the Best Alternative to a Negotiated Agreement process is complex.
- Expert Knowledge and high-level experience are required for determining BATNA.
- The risk of a wrong selection of choice is involved.
- Its determination is a time-consuming process.
- Calculation of BATNA doesn’t consider the future uncertainties.
BATNA, i.e., Best Alternative to a Negotiated Agreement, is a term used to determine the alternative plans if the negotiation or current plans fail. Ensures the smooth conduct of business, and it is cost-effective as through proper determination of BATNA, the unavoidable cost can be reduced, and the profit of the organization can be improved. It also explains the importance of a backup plan in business to keep the faith of stakeholders. It also improves analyzing skills and negotiation skills. Determines the best possible alternative if negotiation becomes unsuccessful. It also determines the importance of the negotiation deal to get the deal, and additional strategies can be framed. But sometimes, the determination becomes a complicated and time-consuming process and requires the expert to determine the BATNA to prevent future losses.
This article has been a guide to what is BATNA and its meaning. Here we discuss features, examples, importance, and identifying Best Alternative to a Negotiated Agreement along with advantages and disadvantages. You may learn more about financing from the following articles –