What is a BATNA (best alternative to a negotiated agreement)
– Definition: BATNA is the course of action you will take if negotiations end without an agreement. It is your fallback plan and the basis for deciding whether to accept an offer or walk away.
– Origin: The term was popularized by Roger Fisher and William Ury in Getting to Yes.
Why BATNA matters
– BATNA provides leverage: knowing you have a viable alternative reduces pressure to accept a poor deal.
– BATNA anchors decisions in facts rather than emotion, helping you avoid the sunk cost fallacy (keeping a position only because you’ve already invested time or resources).
– BATNA helps define the zone of possible agreement (ZOPA): the overlap between each party’s acceptable outcomes.
Key terms
– Reservation value (or reservation price): the worst deal you are willing to accept. If an offer is below your reservation value, you should reject it and use your BATNA.
– ZOPA (zone of possible agreement): the range where both parties’ reservation values overlap; a negotiated settlement is possible.
– Sunk cost fallacy: the tendency to continue a course of action because of prior investments (time, money, reputation), not because it’s the best current choice.
Practical four-step BATNA process
1. List alternatives. Brainstorm all realistic options you could pursue if talks fail (e.g., other buyers, keeping the asset, different suppliers).
2. Evaluate each alternative. Estimate outcomes, costs, timing, and risks for every alternative.
3. Improve your viable alternatives. Where possible, strengthen one or more options (seek new buyers, line up backup offers, reduce costs).
4. Select your BATNA and convert it into a reservation value. Choose the best viable option and define the minimum acceptable deal that beats it.
Short checklist before negotiating
– Have I identified at least three realistic alternatives?
– Have I assigned estimated values, costs, and timings to each alternative?
– Have I tried to improve the top alternatives?
– What is my reservation value (lowest acceptable deal)?
– What BATNAs might the other side have?
– Will I reveal my BATNA? If so, under what conditions?
Strategies and tactical guidance
– Build multiple alternatives. The more feasible options you have, the stronger your negotiating position.
– Improve your BATNA before or during negotiations (e.g., solicit competing offers).
– Use a strong BATNA as leverage: you can credibly threaten to walk away.
– Don’t disclose a weak BATNA. Revealing a weak fallback lowers your bargaining power.
– Watch for sunk-cost bias. Re-evaluate your reservation value objectively as new information appears.
Advantages and disadvantages
– Advantages: provides a backup plan; enables fact-based bargaining; improves chances of reaching an acceptable agreement; reduces emotional overcommitment.
– Disadvantages: finding and improving alternatives can be time-consuming and costly; estimates may be wrong; a misjudged BATNA can lead to rejecting a reasonable offer or settling for too little.
Worked numeric example (takeover offer)
Scenario: Company A offers $20.0 million to acquire Company B.
Company B’s internal estimate of continuing as an independent firm (alternative) yields a present-value forecast of $22.5 million after adjusting for industry headwinds.
Steps:
1. List alternatives: accept the $20M offer; find another buyer; remain independent.
2. Evaluate alternatives: remaining independent expected value = $22.5M; expected cost of searching for another buyer = $0.5M in time and fees; probability of getting a higher offer = 30%.
3. Improve alternatives: Company B solicits expressions of interest and reduces expected sale costs to $0.3M, raising a realistic second-offer expectation.
4. Select BATNA and reservation value:
– BATNA (best realistic alternative) = stay independent valued at $22.5M (or accept a higher competing offer if it appears).
– Reservation value = the minimum cash offer to accept, set just above BATNA to cover transaction risk and uncertainty. For example, reservation value = BATNA − expected negotiation costs (here 22.5 − 0.3 = $22.2M).
Decision: $20.0M < reservation value ($22.2M), so Company B should reject Company A’s offer and