How to Negotiate a Contract: Promoting Your Business Interests

Every contract has one two core elements: a promise and an exchange of value. These aren’t legal jargon. Whether you’re partnering with another business, licensing intellectual property, or hiring a freelancer, your agreement promises to do something, and the other party promises to give something in return.

Diving a little deeper into the anatomy of a contract are the terms. A contact’s terms spell out in detail how the promise and exchange of value will be accomplished.

Don’t miss this: Contract terms are negotiable.

You don’t have to accept the first offer on the table. Through negotiation, you shape the contract to fit your business’s needs and defend your interests while making sure the other party’s needs are met, too. Negotiating the terms of a contract isn’t about “winning” or forcing the other side to bend. It’s about creating a contract where both sides walk away with what they want—a true win-win situation.

In this contract negotiation guide, we’ll walk through how to negotiate contracts thoughtfully and strategically. Each step gives you an example of how to negotiate in the real world. Our goal is that you’ll be able to build agreements that protect your business while meeting the goals of everyone involved.

1. Getting Clear from the Start

It’s helpful to think through what you want from a contract as you approach contract negotiations. Define your needs and priorities. What are you hoping to get out of this contract? Are you licensing intellectual property, working with a vendor, or protecting confidential information? If you get clear on your goals, you’ll be able to focus on the terms that matter most and know where you can flex a little.

For example, when negotiating a sublicensing agreement, your priorities might include 1) Maintaining control over how your intellectual property (IP) is used, 2) Setting reasonable sublicensing fees, and 3) Protecting your IP from potential misuse. By drawing out these priorities upfront, you’ll be more prepared to spot any clauses that don’t align with your needs.

2. Negotiations Mean Revisions

Drafting a contract creates a foundation for conversation. As each party communicates their goals and expectations (another way of saying “negotiating”), their contract will need to be revised. Most contracts go through a few rounds of revisions. If you’re open to changes, it will help you reach a fair agreement without unnecessary tension.

We can use a business sale agreement for an example. You might initially draft a sale agreement that outlines the sale price, payment terms, and conditions for the transfer of assets. But during negotiations, the buyer could request changes like splitting payments over time or seller financing. By revising terms based on each party’s requirements, you’re more likely to reach an agreement that benefits both sides.

3. Negotiate with Questions and Clarification

One of the best ways to negotiate effectively is to ask questions about anything unclear. This is particularly important when dealing with complex contracts that have many moving pieces.  Legal jargon makes interpreting a contract hard. So ask for clarification. Make sure you understand each term. If you understand the terms well, then you can prevent surprises and negotiate any areas that don’t align with your goals.

In an intellectual property (IP) licensing agreement, for example, the other party might include a “territorial exclusivity” clause – legal jargon. This grants them the exclusive right to use your IP in a specific region. If you clarify this term by asking questions, it will help you more understand what you’re agreeing to and allow you to initiate negotiations if you feel the need.

4. Negotiate to Create Balance, Not “Win”

Approach negotiation with a “working-together” spirit. Your goal should be to arrive at a balanced agreement that protects both parties. If you treat negotiation as a battle to be won, the other party may feel defensive, often harming the relationship and making future collaboration impossible.

Aim for terms that fairly meet everyone’s needs.

Sublicensing intellectual property is a great example. Suppose you’re licensing software to a company that plans to give use rights to a 3rd party. You might want to limit how widely they can sublicense the product to limit its use while still allowing them enough flexibility to distribute it effectively. If you negotiate a balance in sublicensing rights, it prevents overuse of your IP while ensuring the sublicensing company has enough freedom to market it.

5. Know Where You Can Be Flexible and Where You Can’t

You might have gathered by now that negotiation involves some give and take. So decide early on which terms are essential for your business and where you can be flexible. Because you know your standards, you will be less likely to compromise on deal-breakers and more likely to know where you can flex.

6. Set Clear Consequences and Expectations

You need to include clear consequences in the terms of any contract. These terms may need to be reviewed and negotiated. When you agree on consequences and expectations, all parties will be held accountable by the terms they’ve agreed on. One specific area where you should include specific consequences are for breaches of contract or failure to meet agreed-upon terms. If there are clear consequences, everyone will know the stakes and it will help to reduce misunderstandings.

Here’s an example: In an IP licensing agreement, it’s crucial to specify what happens if either party breaches the contract by, for example, sublicensing your IP without permission. A well-defined consequence could include financial penalties or removal of the license. These results protect your IP by discouraging misuse.

Expectations upfront can help prevent legal disputes down the line.

7. Don’t Be Afraid to Walk Away

If a contract’s terms are too restrictive or don’t protect your interests, it’s okay to walk away. Not every contract will be a perfect fit, and sometimes declining an offer can prevent potential issues. Walking away isn’t about giving up. It’s about making sure you’re not entering a bad deal.

Think about this in terms of a business sale. After negotiating, you may realize that the buyer won’t flex on terms that would leave you financially undercut. If they’re unwilling to adjust, it may be in your best interest to find another buyer who’s open to fair terms.

Walking away is sometimes the best way to protect your business from bad agreements that could lead to loss or risk.

8. Finish Negotiations with a Review Before Signing

After negotiating, take time to review the final contract and get the help of an attorney if you feel the need. You need to make sure that everything you agreed upon is included in the final contract. Double-check every detail. Don’t forget to read the long paragraphs too. The final contract review makes sure errors are caught and confirms that the contract meets everyone’s intentions.

Balance and Clarity

Negotiation is an essential skill for any business owner. It helps you protect your interests and create terms that work for everyone involved. When you set clear goals, ask questions, and aim for a balanced agreement, you create contracts that truly serve and safeguard your business.

Learn more about contracts: What if you’ve negotiated everything in detail, and someone breaks the contract terms? Our next blog explores what a breach of contract is, how to recognize it, and what steps you can take if it happens.

Sign up to get the “What is a Breach of Contract? 4 Steps to Take if it Happens to You” blog. You’ll get emailed a 6-part series for free. The series covers how to make and use strong contracts to protect and promote your business’s success.