Chapter 13

Negotiation

My first negotiation was with a landlord.

He was a high school principal in East Lansing, Michigan, and he had rented his house, a comfortable two-story colonial, to me and some college friends for the summer. He was going on vacation, and we were going to summer school.

None of us had ever lived in our own house before. We soon figured out that the best thing to do with that much space was to throw parties. They started out small, but as word got around, they grew. By midsummer, our guests even included members of the Michigan State football team. I was a big football fan, and Michigan State was just starting a long winning streak, so I didn’t mind that one bit—until the night a beefy lineman decided to body slam our landlord’s baby grand piano, taking one of its legs right off.

A week later, the landlord decided to interrupt his upstate holiday to pay us a surprise visit.

The house was not a pretty sight. Our landlord was understandably upset. He took one look at his damaged piano and started shouting that he would call Michigan State’s dean and have us all expelled. My roommates were struck dumb with fear.

I knew I had to step in. Mustering my nerve, I told our landlord he had two choices: He could throw us out of his house and get us kicked out of school, which meant he’d have to take care of the mess and repairs himself and find new tenants, or he could forgo calling the dean and let us clean up the house and pay to repair the piano.

He mulled over my offer for what seemed like ages. Finally, he shrugged his shoulders and said, “Fine.” With that, he returned to his vacation. My roommates sighed with relief. We were on the hook for a few hundred bucks, but that was nothing compared to expulsion from school.

I had successfully concluded my first negotiation because I had done three things: made a fair offer, kept my emotions under control, and taken the other party’s interests into account. I improvised that day with the landlord, but with a little forethought and self-discipline, you can apply these three rules to negotiations in every field.

How to Make a Sound Offer Every Time

Negotiation is something many people dread, but believe it or not, it can be pretty simple. I have a formula for making an offer, and once you learn it, you can put it to work in a host of situations.

Let’s say it’s springtime and your house could use some window washing after a wet winter. So you call the first company listed online and they come over and give you a quote. Most people would just accept the estimate or, at most, call up a few other companies and pick the one with the lowest price. Assuming the bidders all are equally competent, why not start with the lowest price and negotiate for a better one?

All you have to do is make the following calculation: What supplies are needed at what cost? How many workers and hours are required to do the job? Factor in wages for the workers, a decent sum for the company’s overhead, and a fair profit for the owner. That’s it—costs, overhead, and profit.

The sum of those things is your offer. Stick to it, and you’ve followed the first rule of negotiation.

In a Good Negotiation, Everybody Wins

Fairness is the most essential part of any negotiation. Over the years, people have said a lot of things about my negotiating style—that I’m tough or that I always get what I want. But they can’t honestly say I’m unfair.

If you’re unfair, people won’t want to do business with you again.

Let’s go back to those window washers. Generally, the difference between their quotes will reflect the differences in the profit they’re hoping to make. Some may pay their workers a little more or buy costlier supplies, but most of the difference will be in their projected profit.

Never try to negotiate the profit down to zero or even below what’s reasonable. A successful negotiation isn’t about you getting everything you want and the other guy getting nothing. In the ideal negotiation, both parties should emerge feeling like they’ve won—maybe not everything they wanted, but something. Fair negotiations can be the beginning of a relationship, often a long-lasting one.

Never Be Afraid to Ask

The most valuable research actually can occur during the negotiation itself. Don’t be afraid to ask questions—I always do. Ask the window washing company how many employees they use per job and what supplies they need. Maybe ask for the time it takes to do one window so that you can multiply by the number of windows you have. Chances are, they’ll just think you’re curious.

Once you have the information and have done the calculation, you can feel confident in your offer, which will help you stick to it. You’re not trying to gouge the other person. You’re trying to create a situation in which you pay a fair price and he makes a fair profit.

You can apply this formula for making an offer to pretty much anything you’re negotiating—not to mention all the things you think can’t be bargained over. Apply it to all your home maintenance—painting, carpet cleaning, roofing, tiling, landscaping, plumbing—and to buying a house or car. Sometimes people will say flat out, no negotiation—in fact, at Kaufman and Broad, we made sure not to let our buyers bargain or pick and choose options because standardization was the only way we could offer homes at a low price. But if the other party doesn’t say that up front, it’s an open field. There’s never any harm in trying.

The last question I always like to ask, when I’ve asked all the rest and we’ve had a back-and-forth but I’m not quite happy with my negotiating partner’s last offer, is this: “Is that the best you can do?” In another context, it’s a question I also ask my employees, as you’ll see in Chapter 16. But it works wonders in a negotiation. You’d be surprised how many times it makes the other person say, “Let me think about it” or “Let me do the numbers again,” before they lower the price.

If this sounds simple, that’s because it is. Trust me. The hard part is when emotions threaten to cloud everyone’s head.

Surviving the Silences and the Stares—Stay Unemotional and Disciplined

One of the reasons most people dislike negotiation is that it involves confrontation. You have to stand your ground and react to pushback. Whether you’re negotiating with your gardener about how much he’ll charge to trim your trees or with an auto dealer about the sales price of a used car, most people feel uncomfortable with the back-and-forth and are nervous about starting the process at all.

That’s when you need to take a deep breath and remember the second of the three rules I outlined: keep control of your emotions. Getting emotional is the quickest way to botch a negotiation. You’ll either push too hard—making the other party feel bullied or unfairly treated—or you’ll give in too soon because you’re afraid to stick to your guns.

The way to avoid getting emotional is to exercise discipline before you enter a negotiation. First, set your limit. What’s the most you’re willing to pay or the least you’re willing to work for? If the other party pushes you beyond the number you’ve set for yourself, be prepared to walk away.

My limit is always firm at the most I think something is worth. I never pay more. That hasn’t changed from when I was 23 and had a few hundred bucks to my name. Early in my career, I never would have imagined I would pay tens of millions of dollars for a piece of art. But I’ve loosened up a bit, and I understand that if you love something, its value is calculated in more than dollars.

Take a sculpture I bought in 2005, David Smith’s Cubi XXVIII. Many people consider Smith, who was part of the abstract expressionist circle, to be the twentieth century’s preeminent American sculptor. I had wanted a Cubi since 1994, when one came up for auction at Sotheby’s. When the price went above $4 million—too high by my estimate—I dropped out. As the years passed, I regretted it. Smith made only 28 of the towering stainless steel pieces, and all but three already were in museums. I had underestimated both the piece’s rarity and the escalation in prices the contemporary art market would undergo. In 2005, when another Cubi came up for auction, I was determined to get it. Even so, I maintained my discipline and went into the sales room with a top price—$25 million—in my head. I got the piece for $23.8 million, which was the highest price ever paid at the time for a contemporary work of art at auction.

Whenever you’re going into a negotiation, recognize how badly you want something and what you’re willing to do to get it—even pay a premium, a price higher than what others might pay or think it’s worth. But make that calculation before you are in the heat of negotiation. Then be disciplined. Never let emotion or exhaustion or anything else lure you beyond that limit.

Be Ready to Say Yes and Don’t Sit Down Unless You Can Make a Decision

If you enter a negotiation without having the power to say yes or no—if you need to run things by colleagues or bosses or lawyers or accountants—you risk losing whatever ground you’ve gained. You risk having to start again, maybe at a different and more difficult place once your negotiating partner has had time to think. Don’t go into the room unless you’re prepared to make a decision.

In my negotiation to buy an important art collection for the Museum of Contemporary Art, for instance, I made sure not to start talks until I had the go-ahead from MOCA’s full board.

MOCA was a brand-new institution in a city that previously had lacked a showcase for contemporary art. We had a building, a board, and an endowment—but no art. That was a problem for an art museum.

One of our trustees, Count Giuseppe Panza di Biumo, was facing a problem in that he had to sell his great collection of contemporary art—80 works amassed between 1956 and 1963—or pay enormous taxes on it, which he could not afford. The count, an Italian businessman and one of the first European collectors of American postwar art, was upset. He had spent decades studying art, meeting artists, and painstakingly acquiring first-rate artworks. He was a smart collector with a great eye, and all his work would be for nothing if the collection was broken up and sold to private collectors around the world. If he couldn’t have them, he wanted to see them all in a good public museum.

The count’s collection was perfect for MOCA. It contained works by Mark Rothko, Robert Rauschenberg, Franz Kline, Roy Lichtenstein, and several other leading artists. The pieces the count had were all stellar examples of those artists’ work. Sotheby’s appraised the collection at somewhere between $11 million and $15 million. MOCA’s board decided the highest we could afford to pay was $12 million. I decided to start negotiations at $11 million—a fair point because it was Sotheby’s low estimate—and I aimed to stay at that price, although I was willing to negotiate other particulars.

I spent about six months wooing the count—showing him around L.A., introducing him to our then mayor, Tom Bradley, and making sure he saw why the city needed his collection. But the actual negotiations were completed in a day. That’s because the MOCA board had already given me its limit and had given me full authority to negotiate and to sign a deal. The timing was right too—the count had to sell soon because the Italian government had given him a deadline that was approaching.

Don’t Swing Wildly—Start Close to Where You Want to End Up

In negotiations a lot of people like to start very low and work their way to the middle. They think this makes both parties happy—the feeling of winning ground, of coming to agreement from a great distance.

I disagree. Going back-and-forth wastes too much time, and more often than not, people feel like they’re losing each round rather than winning.

Instead, I do something that most people consider unreasonable: I make a first offer that’s pretty close to my final offer. I leave a little wiggle room, some space to meet the other party, but that’s it. This shocks people and makes them think I drive a hard bargain. In fact, I’m just saying exactly what I mean and sticking to it. Most people will meet my offer, or come very close, once they realize I’m not going to budge much from what we both know is fair. It saves us all a lot of time and pain.

In my MOCA negotiation with the count, my first offer was almost precisely where I wanted to end up—even though my limit was a bit higher. I stuck to $11 million, although the count pushed for $12 million. I countered by promising him a higher down payment. We were able to agree on $11 million with the higher down. The collection today is probably worth at least a billion dollars.

I was able to keep my head, not get emotional, and stick to my offer when the count made his counterproposal. Knowing you’ve made a fair offer, setting your limit, and keeping a level head should prevent you from doubting your position, no matter what. You’ll have to face counteroffers, dead silence, steely gazes, and awkward pauses. But you have to keep your eye on the endgame and not let all the rest distract you.

Never Forget What Makes the Other Guy Tick

The third rule of negotiation is to be conscious of the other person’s motives. These include the things he or she tells you up front, extenuating circumstances you know about the person, and what you determine is important to the person with whom you’re negotiating. Those latter factors can be the most powerful.

For my negotiation with the count, I knew his interests from the start. He often visited L.A. in his capacity as a MOCA trustee and to check out the local art scene. He stayed at our guesthouse with his wife. When it came time to sell his collection, I knew his foremost concerns: Selling soon to avoid paying taxes and keeping his collection whole rather than seeing it dispersed piece by piece.

I worked all this into my offer by promising the count we would be a very swift buyer and by assuring him we would try our hardest to keep the collection whole—that we would sell a piece only if we needed the money to pay him.

I also thought about issues that the count hadn’t articulated but I could reasonably assume were on his mind. Because he was a MOCA trustee, I figured he would like to have a hand in ensuring the museum became a world-class institution—which it instantly would if we had his collection. I knew he liked Los Angeles because he loved its artists, particularly Robert Irwin and James Turrell. And I knew he would like the idea of keeping his collection together.

But the best move you can make in a negotiation is to think of an incentive the other person hasn’t even thought of—and then meet it. That’s what sealed my negotiation with the count, and it occurred to me only when I was sitting opposite him.

He was pushing for $12 million, and I wanted to stick to $11 million. I offered him a higher down payment with the balance paid out over several years. The count agreed but wanted more money up front.

That’s when it came to me. If we gave the count an even bigger lump-sum payment up front, he would have to convert it to Italian lira. Going from dollars to lira was a losing proposition. The lira was inflating fast. If he converted more right away, he would end up with less money than if we paid him some now and some later.

If you can find an incentive like this—something the other party hasn’t yet figured out—it can change the tenor of your negotiation. It will immediately be clear to them that you’re not trying to trick or manipulate them and that you just want everyone to get a fair deal. It’s the most powerful tool in any negotiator’s bag. To use it, of course, you have to do a lot of homework.

When I shared my thinking on the lira, the count agreed with my initial offer. I had managed to see an incentive he had missed. In doing so, I helped him actually make more money, without losing anything for the museum. We were both winners—and the biggest winners of all were MOCA and the city of Los Angeles.

Now that’s negotiating.