BATNA stands for best alternative to a negotiated agreement. It’s what you will do if the deal in front of you doesn’t happen, and it sets the point where walking away is better than agreeing. If an offer is better than your BATNA, it’s worth taking. If it’s worse, you’re better off with the alternative.
The term comes from Getting to Yes, the 1981 book by Roger Fisher and William Ury of the Harvard Negotiation Project, and the Program on Negotiation at Harvard Law School teaches it as part of preparing a negotiation.
I’ve raised £250m+ for my own companies and funded more than 750 businesses with over £1bn, so I’ve negotiated deals as a founder, as an investor and as a lender.
What BATNA Means
Your BATNA is a real course of action you can take. When a founder is negotiating with an investor, it might be a term sheet from a different investor, a loan, or carrying on without the money and growing more slowly from revenue. When an owner is selling a business, it might be another bidder, or keeping the business and taking the profits.
The strength of your position in a negotiation depends on how good that alternative is. A founder with a second investor ready to sign on similar terms can hold out for what they want. A founder whose only alternative is running out of cash in 3 months has very little room to hold out for anything.
Your BATNA also has to be something you can do without the other side agreeing to it. “The investor might improve their offer” isn’t an alternative, because it depends on the investor. “Another investor has offered £400,000 at a £2.5m pre-money valuation” is.
BATNA vs Reservation Price vs ZOPA
Three terms come up together when a negotiation is being prepared.
| Term | What it is | Example when selling a business |
|---|---|---|
| BATNA | What you will do if this deal doesn’t happen | Accept a second bidder’s offer of £3.6m |
| Reservation price | The worst terms you’ll accept in this deal, worked out from your BATNA. Also called the walk-away point or reservation value | Around £3.6m, adjusted for timing and certainty |
| ZOPA | The zone of possible agreement: the range between the seller’s lowest acceptable price and the buyer’s highest | Between the seller’s £3.6m and the buyer’s top price of £4.2m |
Your BATNA is the alternative itself. Your reservation price turns it into a number for this deal. If the second bidder offers £3.6m but would take 6 months longer to complete, a seller might accept a little less than £3.6m from a buyer who can complete sooner, so the reservation price can sit slightly above or below the BATNA’s headline value.
The ZOPA exists only when the buyer’s highest price is above the seller’s lowest. If the most a buyer will pay is £3.4m and the least a seller will take is £3.6m, there’s no deal to be done at any price.
Working Out Your BATNA
- Listing the alternatives. This is everything that could be done if this deal doesn’t happen. For a founder raising money it includes things like other investors, borrowing, selling assets, cutting costs or changing the plan.
- Checking each one is real. An alternative only counts if it can be carried out. An investor who said they “might be interested” isn’t the same as one who has sent a term sheet, so the work at this stage is turning possibilities into firm offers.
- Putting a value on each. Each alternative is compared in the same terms as the deal on the table: money, ownership, timing, risk and what has to be given up.
- Choosing the best. The best of them is the BATNA.
- Setting the reservation price. This is the worst set of terms in this deal that is still better than the BATNA. Anything worse than that and walking away gives a better result.
Say a founder is negotiating a £500,000 investment. The alternatives and their values might look like this:
| Alternative | What it means for the founder | Firm? |
|---|---|---|
| Second investor | £400,000 at a £2.5m pre-money valuation, so the investor owns 13.8% | Term sheet received |
| Borrowing | £250,000 over 5 years, no shares given up, but repayments start straight away | Indicative only |
| Grow from revenue | No new money, the plan takes 2 years longer | Always available |
If the second investor’s term sheet is the best of the three, the founder’s reservation price on the deal being negotiated is the equivalent of £400,000 for 13.8%. An offer of £500,000 for 20%, which is a £2m pre-money valuation, gives the founder more money but means giving up more of the company, so they would compare the two on what the plan needs and what each leaves them owning. How the percentages work is set out in pre-money vs post-money valuation.
Estimating the Other Side’s BATNA
The other side has a BATNA too, and it decides how far they’ll move. A buyer with three other businesses on their shortlist will walk away more easily than one who has looked for a year and found nothing else. An investor with plenty of other deals on offer has more choice than one who needs to put money to work before their fund’s investment period ends.
You won’t know their BATNA for certain, but you can estimate it from things like:
- What else is on the market. Other businesses for sale in the same sector, or other startups raising at the same stage.
- Their timing. A fund near the end of its investment period, or a buyer who has promised their own board an acquisition this year, has less room to wait.
- What they’ve told you. Investors and buyers often say what else they’re looking at, which can be accurate or a negotiating move.
- What it would take them to do it themselves. A buyer who could build the same thing in-house for less has a strong alternative to buying you.
The point of estimating their BATNA is to work out where the ZOPA is likely to be. If your reservation price is well inside what their alternative allows, there’s room to push. If it’s close to the edge, the deal may only work on terms near your walk-away point.
Strengthening Your BATNA
A BATNA is improved before the negotiation starts, because once talks are under way there’s little time to create a new alternative. For a founder raising money, the most direct way is talking to more than one investor at the same time, so that a second term sheet exists when the first is being negotiated.
A business that could borrow instead also has a real alternative. For UK businesses, Funding Guru arranges business loans, and having a loan offer in hand puts a number on what equity is being compared against.
For a seller, it means running a sale with more than one buyer. For a buyer, it means having a second target or a plan to build the capability in-house.
The business itself matters too. A business with growing revenue and a clear plan has more options, because more investors and buyers are interested in it. A pitch deck and an investment memorandum that set out the plan clearly bring in more interested parties, and each one is a possible alternative.
A strong BATNA is often shared with the other side, because it shows them the limit of what you’ll accept. Telling them about a weak one moves the ZOPA in their favour, which is why it’s usually kept back. The Beyond Intractability essay on BATNA sets out this point on disclosure in more detail.
BATNA Examples
Raising Investment
A founder is raising £500,000 and has a term sheet from one angel. A second angel has offered £400,000 at a £2.5m pre-money valuation. A business loan of £250,000 is also available.
The second angel’s offer is the founder’s BATNA. When the first angel proposes a lower valuation, the founder can compare it directly with the second offer, rather than with nothing. The valuation is only one term. A term sheet with a higher valuation but a participating liquidation preference can leave the founder with less on a sale than a lower valuation with a 1x non-participating preference, so the alternatives are compared on all the terms, not just the headline number.
Buying a Business
A company wants to buy a competitor for its customer base. The seller is asking £1.2m. The buyer’s alternatives are a different competitor available for £1m with fewer customers, or building its own sales team, which would cost £900,000 over 18 months and win customers more slowly.
If the second competitor brings 80% of the customers for £1m, that’s the BATNA, and the buyer’s reservation price on the first deal is roughly what the extra 20% of customers is worth on top of £1m.
Selling a Business
An owner has an offer of £4m for their business. A second bidder has offered £3.6m. The owner could also keep the business, which makes £500,000 a year in profit.
The second bid is a firm alternative, so the owner’s reservation price on the first deal starts at £3.6m. Keeping the business is also an alternative, valued on its profits and what it might sell for later. Once a price is agreed it usually goes into a letter of intent, and from then on the owner’s BATNA is weaker, because other bidders often move on during exclusivity.
FAQs
What does BATNA stand for?
BATNA stands for best alternative to a negotiated agreement. It’s the course of action you’ll take if the current negotiation doesn’t produce a deal.
What is the difference between BATNA and a walk away point?
Your BATNA is the alternative you’ll take if the deal fails, and your walk away point is the worst terms you’ll accept in this deal. The walk away point, also called the reservation price, is worked out from your BATNA.
Should you tell the other side your BATNA?
It depends on how strong it is. A strong BATNA, such as a firm offer from another investor, shows the other side the limit of what you’ll accept, so it’s often shared. A weak one is usually kept back.
Can your BATNA change during a negotiation?
Yes. Another investor might drop out, a new bidder might appear, or the business’s results might change. A BATNA is checked again whenever something changes, and the reservation price with it.
Next read
How to prepare for a negotiation like this and run it, from working out your walk-away position to closing the deal, is what I teach in the Negotiation Masterclass. If you’re raising and want it run properly, from making the business investable to getting in front of the right investors, that’s what Capital Raiser does.
