Matt Franz : Zealous For Knowledge

Put the gun in the other person’s hand

Patrick O’Shaughnessy had Andy Rachleff, CEO of Wealthfront, on his podcast recently. Rachleff discussed his negotiating philosophy, which he called “putting the gun in the other person’s hand.” The concept is to give the other party a (metaphorical) gun to see if they will fire it. If they fire, you don’t do the deal and have avoided a doomed partnership. If they don’t fire the gun, you get a fair price and have an honest business partner.

For example, when Rachleff is making an acquisition he will ask the other party to name a fair price. Most people will feel intense pressure to deliver something that’s actually fair. A few will get greedy and name an exorbitant price. If the price that comes back seems reasonable, Rachleff closes the deal. If the price is ridiculous, he will pass and move on.

Buffett and Munger use a similar approach at Berkshire. One of the acquisition criteria listed in Berkshire’s annual report is: “An offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).”

This tactic is useful because it avoids drawn-out negotiations, achieves a fair deal, self-selects business partners who are trustworthy, and builds goodwill with them.

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