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BATNA

"Best Alternative To a Negotiated Agreement"

What is BATNA?

BATNA is an acronym that stands for “Best Alternative To a Negotiated Agreement.” It is defined as the most advantageous alternative that a negotiating party can take if negotiations fail and an agreement cannot be made. In other words, a party’s BATNA is what a party’s alternative is if negotiations are unsuccessful. The term BATNA was originally used by Roger Fisher and William Ury in their 1981 book entitled “Getting to Yes: Negotiating Without Giving In.”

 

BATNA

 

Importance of BATNA

BATNA is often used in negotiation tactics and should always be considered before a negotiation take place. Therefore, it is never wise to enter into a serious negotiation without knowing your BATNA. The value of knowing your best alternative to a negotiated agreement is that:

  1. It provides an alternative if negotiations fall through.
  2. It provides negotiating power.
  3. It determines your reservation point (the worst price you are willing to accept).

 

Illustration of BATNA

The following diagram illustrates each party’s best alternative to a negotiated agreement (seller and buyer):

 

BATNA - Illustration

 

Where:

  • ZOPA stands for “Zone Of Potential Agreement.” It is the overlap between the seller’s and buyer’s settlement range.
  • Seller’s settlement range is a biddable range by the seller.
  • Buyer’s settlement range is a biddable range by the buyer.
  • Buyer’s/Seller’s worst case is the reservation point of respective parties.

 

If:

  • Buyer offers a price that is lower than the seller’s worst case, seller is better off going with an alternative.
  • Seller offers a price that is higher than the buyer’s worst case, seller is better off going with an alternative.

 

Example of BATNA

Colin needs a car and is negotiating with Tim to purchase his car. Tim offers to sell his car to Colin for $10,000. Colin scours through Craigslist and finds a similar car to which he assigns a dollar value of $7,500. Colin’s BATNA is $7,500 – if Tim does not offer a price lower than $7,500, Colin will consider his best alternative to a negotiated agreement. Colin is willing to pay up to $7,500 for the car but would ideally want to pay $5,000 only. The relevant information is illustrated below:

 

BATNA - Example 1

 

In the diagram above, if Tim offers a price higher than $7,500, Colin will take his business elsewhere. In the example, we are not provided with Tim’s BATNA. If we assume that Tim can sell his car to someone else for $8,000, $8,000 is Tim’s BATNA. In such a scenario, an agreement will not be made as Tim is willing to sell for a minimum of $8,000 while Colin is willing to purchase at a maximum of $7,500.

If Tim’s best alternative to the deal is selling the car to a dealership, which would offer him $6,000, both parties can come to an agreement. In the situation described, the diagram would look as follows:

 

BATNA - Example 2

 

In such a case, there is a zone of potential agreement – $6,000 to $7,500. In this range, both parties can come to an agreement.

 

Identifying Your BATNA

As illustrated in the example above, having a best alternative to a negotiated agreement before entering into negotiations is important. Had Colin not have a BATNA, Tim would have more bargaining power. Knowing Colin’s BATNA is at $7,500, the highest price that Tim would be able to sell his car to Colin for is $7,500.

 

Here is a process developed by Harvard Law School to develop the best alternative to a negotiated agreement:

  1. List all alternatives to the current negotiation – what could you do if negotiations fall through?
  2. Evaluate the value of each alternative – how much is each alternative worth to me?
  3. Select the alternative that would provide the highest value to you (this is your best alternative to a negotiated agreement).
  4. After determining your BATNA, calculate the lowest-valued deal that you’re willing to accept.

 

Related Readings

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

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