PULL AHEAD OF THE PACK with a negotiauction

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M any complex deals between buyers and sellers - from home sales to purchasing auctions to corporate mergers - qualify as negotiauctions - a transaction in which both auction-style bidding and one-on-one negotiation occur in the course of a single deal. Yet because negotiation and auction advice tend to come from two different camps, real-world dealmakers have had to navigate this rocky terrain intuitively.

A negotiauction has the following features, according to Guhan Subramanian, a Harvard University professor and author of "Negotiauctions: New Dealmaking Strategies for a Competitive Marketplace":

1. One-on-one negotiations. At some stage during a negotiauction, the seller engages one or more buyers in private discussions about the asset on the table.
2. One or more rounds of bidding. At a certain point during a negotiauction, the seller pits potential buyers against one another in an auction.
3. Several, but not too many, potential buyers. Typically, between three and 10 potential buyers are needed for a negotiauction - enough parties to spark an auction but not so many that one-on-one negotiation would be difficult for the seller to manage.
4. Information disparity. In a negotiauction, the seller usually knows more about the situation and the asset at stake than potential buyers do. Buyers face the challenge of overcoming this information asymmetry.
5. Process ambiguity. In a traditional auction, the seller determines the process, and buyers are passive participants. In a negotiauction, by contrast, the process is up for grabs. Canny buyers seize opportunities to change the process to their advantage.
A negotiauction often begins as an auction that narrows the field, followed by one-on-one negotiations with the highest bidders. But that's not always the case. Someone shopping for a new car could hold an Internet auction and then try to negotiate better terms with the lowest bidder. Alternatively, she could first meet with dealers individually to discuss options and only later encourage them to engage in auction-style competition for her business. As this example illustrates, perhaps the key trait of negotiauctions is flexibility.

THE SELLER'S PERSPECTIVE: SETTING THE PROCESS

Imagine that as the seller of an asset, you're in charge of setting up a negotiauction. How should you determine when to negotiate and when to hold an auction? In "Negotiauctions," Subramanian presents four key points:

1. Profile of potential bidders. Don't assume that you should automatically negotiate if you have few potential buyers and hold an auction if you have many. Although the number of bidders is important, other bidder characteristics matter, too. In general, if the bidders are well known to you, if they have strong alternatives to negotiating with you, and if they value your asset very differently, negotiation makes more sense than an auction.

2. Asset characteristics. Three key features of your asset can guide you toward the right process: (a) if you can clearly specify the asset you're selling (whether boxes of paper or an heirloom necklace), it's time to auction, but if an asset is hard to pin down (such as business services or "toxic assets"), focus on negotiation; (b) if issues other than price are at stake (such as delivery time and new business), use negotiation to add value to the deal; (c) if you want to build a long-term relationship with the winning buyer, lean toward negotiation.

3. Seller profile. Next, examine your profile as the seller. If you're in a hurry, an auction might seem like a natural choice, as auctions are generally quicker than negotiations. But note that with speed comes risk. If no bidders or only one bidder shows up to your auction, you've doomed yourself to a bad deal. So if risk is a concern, lean toward negotiation.

4. The broader context. If it's important to you to keep your potential deal a secret, as might be the case if you're selling your business, the privacy of negotiation may be a better fit than the more public nature of an auction. By contrast, if transparency is important, hold an auction. Governments, for example, often choose to auction off contracts to avoid accusations of corruption or bias.

When planning a negotiauction, determine which factors are most important to you and plan your process around them, giving yourself flexibility to adapt the process as it unfolds. Consider allowing your potential buyers to innovate as well.

THE BUYER'S PERSPECTIVE: CHANGING THE GAME

As a buyer, rather than assuming that you must abide by the seller's deal-making process, consider whether you can implement one or more of these three moves and pull ahead of the competition:

1. Setup moves. Imagine that you've conducted one-on-one negotiations with a customer for many years. Out of the blue, the customer informs you that your contract is being put up for bid. You and a host of other suppliers are being invited to participate in a single-round online auction in which the lowest bidder will walk away with the contract.

2. Rearranging moves. Either at the outset of a negotiauction or as the process unfolds, you can try to rearrange the assets, the parties, or both in a way that adds value to the deal.

3. Shutdown moves. A shutdown move prematurely cuts off competition on the same side of the table. A last-minute stealth bid in a traditional auction that allows the bidder to negotiate exclusively with the seller is one example.

To carry out a shutdown move, first figure out if you have an edge - unique expertise that allows you to evaluate the asset's value better than your competitors. Second, make sure your offer improves on the seller's perceived alternatives - or worsens them. For example, threatening to withdraw from an auction if your final offer is turned down might inspire a seller to accept it if she'd be left with a much less appealing option. Finally, time your move carefully, lest it backfire. A shutdown bid delivered at the start of an auction, for instance, could inspire a bidding frenzy that drives you out of the race.