Business 322: This Case Is In Respect Of Negotiation Planning And Presentation Of A Proposal: Negotiations And Dispute Resolution Assignment, HCBU, Ireland

This case is in respect of negotiation planning and presentation of a proposal to Jimmy and Will Reed, and a sister, Ollie, of Oxford, Mississippi. The Reeds have lived in Oxford since the early 1800s, purchased much land from Indians, were farmers, and owned a mercantile store at one time, but for the most part, recent generations have lived off inherited wealth – land sales and income from stock and bond investments derived from direct land sales.

In terms of both good and bad, their history is rich in Oxford folklore, but they are generally respected in the community and have many friends. Privately, though, they have never felt they have gotten their due recognition for their contributions to the community, or so they believe, particularly in respect of Jimmy who feels short, and in indeed this is understandable, as an earlier family member was instrumental in founding Ole Miss and the Grove. Will is quiet; conversely, Jimmy is outgoing, but the brothers get along fine.

Will usually follows Jimmy’s lead. Will, known locally as a financially astute individual, drinks coffee every morning by himself at the Houlka, a local restaurant, but loves to meet new people and enjoys talking to visitors and particularly Ole Miss students. Ollie is homebound and doesn’t get out much. Both Will and Jimmy care for her with local hired help.

The last family real estate holding is a two-acre parcel on West Jackson Avenue, located within the city limits and with a very large, beautiful oak tree, at least 100 years old, similar to ones on Lamar Avenue, in the middle of the track, which must be removed for construction purposes. Because this is the last remaining parcel on West Jackson, near the University, with no other properties expected to come onto the market, it is highly coveted for real estate development. Indeed, the Reeds been approached many times to divest, but haven’t given it much thought.

Students consider yourselves Ole Miss graduates who now work for the Downhome Restaurant Corporation, a fast-growing chain known for its “high-quality handmade, never-frozen, European-style, breakfast Belgium waffles,” and you were promoted recently to serve as the Mississippi, Alabama and Louisiana Regional New Business Development Manager. Your responsibilities include site selection, franchising, joint venture setup, and related negotiations with potential restaurant investors and their legal counsel, in addition to meeting with real estate brokers and landowners, and you have the authority to hire consultants to assist you in your endeavors.

You originate the deal from conceptual markets to site acquisition, to joint venture or franchise, to the grand opening, and then turn it over to operations. In the company, these employees are known commonly as the “developers”. You aspire to grow in the company as a leading developer, and your performance reviews have been “above average” but not the higher “exceptional” rating reserved for the top 10% and “President’s Club” in which developers meet quarterly with top management for strategy planning – which is seen internally as a great career development opportunity.

This past August 22, Downhome Restaurant’s president visited Oxford to attend a football game and shared a stadium suite with the Mayor and Chancellor, who asked him why Downhome Restaurants does not have an Oxford location, which embarrassed the president. He promised to consider it, and when opened, offer invitations. Highly pleased, the mayor and chancellor agreed to attend the grand opening and enjoy waffles with the media. The president even offered to provide a free weekly breakfast card for life to the Chancellor and Mayor for attending, and offer usually granted to local dignitaries at grand openings.

Returning to Nashville, the president told his team and the vice-president that the weekend in Oxford was fantastic, and wondered how they missed this coveted, key growth market. While going out to dinner, he saw a great two-acre lot on West Jackson adjacent to the University to consider, but it was not listed for sale, apparently for some unknown but justifiable reasons he noted, given all the surrounding developments, and said he wanted a briefing in near future on the Oxford market as a whole. In the following week, the mayor tweeted, “Oxford loves waffles. Is a Downhome Restaurant coming soon?” The Mayor knew this would create local interest but had no idea it would go national on the nightly news. Upon its arrival at the home office, the executives were surprised and wondered what it portends for the company’s stellar reputation as being community-minded, but without a local presence in Oxford.

When the message was re-tweeted, other Mississippi college towns already having Downhome Restaurants responded that they were better than Oxford and love Downhome waffles. Even the governor tweeted that he would come to Oxford and have waffles, so it became a high priority to determine if an opportunity exists while managing endless, time-consuming media issues relative to the Oxford market.

As a company, Downhome is open generally to franchises, joint ventures, or any investment frameworks are available and the company is completely flexible on corporate sites, including financing locally as well as 100-percent company-owned stores, as located elsewhere, and its leadership believes this diversity and openness to any and all commercial arrangements are the cornerstones to providing solutions for key sites, great financial ratings and the balance sheet it currently enjoys, given the multiple income streams provided from the flexible commercial arrangements for company sites.

Upon arriving September 8 in Oxford to assess the real estate market, you meet with banker Ernest Smith, and Sonny Clanton, who is a respected attorney with substantial connections and a thorough knowledge of how the town works, both inside and out, but his schedule on the day of arrival without an appointment didn’t allow anything more than an exchange of pleasantries and introductions, due to a court appointment for his client. Smith did introduce Peanut McCormick, an experienced commercial real estate broker, who said nothing is available on West Jackson, but two, one-acre lots near the new hospital were available. Peanut shows you these lots for initial consideration and site evaluation.

Listed for $500,000 each, these lots, optimally sized for restaurants inside city limits, offer growth potential, but presently don’t have the volume of street traffic Downhome prefers, but are cheaper. Concerns exist about health trends and breakfast restaurants near hospitals, but no restaurants are within the immediate area, so the higher risk is likely reflected in the price which is less than other locations; otherwise, they are suitable.

Peanut indicates that lots north of Oxford are lower priced but have less traffic and need growth to materialize as a valuable commercial option, but growth is headed in that direction. Other less desirable locations would require substantial dirt work or may have erosion or water issues. Downhome typically aims to invest around $1,000,000 per lot — cheaper if possible, for sunk costs in terms of real estate parcels — in order to increase return, all else being the same.

Downhome needs optimally no more than a one-acre lot. The average location’s construction cost when fully furnished, including restaurant equipment, is $1,000,000, so ideal locations are in the neighborhood of a $2,000,000 investment, more or less. For assessment purposes, the company classifies lots as A, B, or C grades. “A” lots are deemed ideal, but have scarcity attributes, as they are typically in aspired high-volume locations. Starkville has an “A” location near Mississippi State University; Hattiesburg has a “B” location near the University of Southern Mississippi.

While discussing prospective locations when you arrive back to the bank from looking at locations with Peanut, Smith mentioned the Reed lot on West Jackson, a choice location within city limits. He is Jimmy Reed’s friend, and believes he may sell, but believes a punch-in-the-face-top-dollar offer would be needed, as Reed is always reluctant to sell — and frankly does not need to. He said Jimmy mentioned building something there himself, and once discussed building an apartment complex, given lower interest rate returns on existing investments.

Smith said that because the Reeds are always reluctant to sell, people make notional purchase price offers for their consideration, but are repeatedly turned down; however, he also mentioned they are not averse to selling at the right price, as they have done that for generations on other properties. They just don’t sell anything at a discount or for what they perceive as being below market, but for the relationships are similarly important. They remain concerned about their standing in the community; this is of particular importance to Jimmy trying to protect the family heritage in Oxford.

Jimmy is known for his colorful personality and for his famous saying around Oxford — “He who has the gold makes the rules” — to which the banker just tells him the bank has no gold. Jimmy complains incessantly about property taxes, politics, the parking meters on the square, and low rates on certificates of deposit. It is also interesting that Jimmy has a son attending MSU and goes to Starkville every weekend, for which he is ridiculed locally, but it doesn’t seem to bother him, because as the banker said, Reed is known as a Rebel at heart.

While you are in Oxford, a market assessment is completed on an urgent basis at the home office, which determines, not surprisingly, that Oxford’s highest traffic is on West Jackson, and that the street as a whole an “A+” rating from downtown Oxford to the highway, always better closer to the university, but notes that essentially nothing is currently available, and in some cases, the assessment acknowledged higher prices of comparable properties along West Jackson are recently exceeding $1,000,000 per one-acre lot. Of note, America’s largest hamburger chain reportedly just paid a little above that amount for a good one-acre lot on West Jackson which otherwise would be an “A+” lot in the classification system but this information is not confirmed as to accuracy.

Alternatively, two suitable B grade, one-acre locations near the hospital and Taylor road are available, and a C grade in North Oxford — an emerging area expected to grow — where site non-restricted locations exist. The market assessment stated an expected annual net income or profit for an A-level property is $400,000 (20% return on a $2,000,000 investment). For illustration, this anticipates monthly revenue of $250,000 or 3,000,000 per year in gross proceeds for an A-level location and a net profit margin of 13.33 percent on gross proceeds. For a B-level, $200,000 annual net income or profit anticipating $500,000 lot costs (13% return on a $1,500,000 investment). The C-level per-lot properties cost $250,000 and could provide $100,000 net annual income (8% return on a $1,250,000 investment). As a benchmark, Downhome restaurants provide an average return of 12% on an annual basis on invested capital across the corporate chain locations on the total portfolio.

In general, the market assessment reflected that real estate prices particularly for commercial lots have risen substantially over the last 20 years, which is a trend expected to continue in the future and that some investors in Oxford buy lots purely for investment purposes, and that investors which have followed this approach have been rewarded with annual returns on investment generally exceeding 10%. The assessment report indicates this trend is expected to continue, anticipating further growth in Oxford.

Interestingly, the market assessment further noted that Oxford as a whole could be a “blow away” market and achieve top tier corporate status in year one, given lack of breakfast options generally, and the media storm caused by political officials and related anticipation as never seen before. Some people are worried about perceptions in the company, almost to the level of a “witch-hunt” as to why they have not located in Oxford previously, given the growth market conditions and what do we need to do to plan for the future growth of the market as a whole. The president is making inquiries of his top management, discussing football games and how nice it would be to have a location there and the related growth opportunities and what is needed to be successful if the market is as big as we could anticipate. You feel the anxiety is growing within the company.

You know that given its AAA credit rating borrowing costs for Downhome are 4%, among the lowest in the industry, and the anticipated inflation rate is 2% per year, for the foreseeable future. This is a Downhome advantage even though it is a privately held company, as competitors have higher capital costs with lower credit. Recently a competitor’s bond offering had an interest rate on debt of 6%, as it is not investment grade. Downhome is community-minded and typically offers to host charity events at the restaurant and helps local schools — facts probably in your mind as the key basis which the mayor will tweet to get more local support and entice Downhome to the area.

You meet with your vice-president on Tuesday, September 22, who indicates that Oxford is looking more and more like a “must-have location,” and he appreciates your keeping him up to date, as he gets questions weekly from the president on progress and is worried about the mayor going rouge and tweeting more. Also, he heard that the Oxford Police Department’s tweets about waffles being good nutrition for police on duty are not drawing the kind of attention they desire without a local facility.

The vice-president encourages you to revisit Oxford and assess locations as a matter of priority, as it seems the hospital location is available for sure and, most disturbingly, he hears through suppliers that a leading competitor, Breakfast House, is also looking at the Oxford market, given the media attention. Breakfast House has no other locations in college towns in Mississippi except for a great restaurant in Gulfport, which everybody talks about and gets great reviews. Anxiously, you leave Nashville on Monday, September 28 for another road trip to Oxford.

While meeting with Peanut, the real estate broker, you learn that for properties within Oxford, a strict Architectural Control Committee “polices” construction to maintain the city’s “texture and rhythm — whatever that means,” he concluded. He also mentioned that it is very political, and some people get more scrutiny than others, but in all cases, signage has a height restriction and décor requirements mandating the usage of bricks similarly colored as other stores in the area; otherwise, if your site construction is “normal” and similar to surrounding buildings while maintaining the feeling that it was there all along, you will be fine. While this is not a problem directly, it does require alteration of normal Downhome practices, and you are not sure how that would work in practice, but, more disturbingly,

Peanut advises you of the infamous “Tree Conservation Board” which requires a permit to remove trees in the city limits. Peanut encourages you to use all due care in dealing with the Architectural Control Committee and the Tree Conservation Board and to retain a good attorney, as they are strong on aspects between both those tied to a legacy and those with stated future aspirations – the so-called making-it-what-it-could-be personalities. The attorney can mediate peace in the process to achieve your objective.

The broker described it as being like walking a tight rope across the Grand Canyon, but if carefully managed it is important to note that all members respect each other and have intentions to improve but maintain Oxford, so it works in practice. You can get to the canyon’s other side but expect some fear along the way. He said it is best to make a conditional offer subject to the approval of the tree and architectural committees, as owners now appreciate the difficulties of getting approvals in Oxford over prior and more relaxed practices.

At this point, Peanut breathed a sigh of relief that no issues exist with the Tree
Conservation Board on the hospital lots, as no trees are present, and he already has the certification to this effect in hand, so only architectural control is present. While driving back to Oxford, Peanut stated that the Tree Conservation Board is ambitious and relatively new, so not knowing what they wish to achieve is always difficult, but they love trees and you know you have one that is 100 years old.

Peanut did mention the desire of the Tree Conservation Board to plant a variety of new hardwood species to reforest 100 city-owned acres as a nature preserve, ideally as it was when Choctaw Indians held the land, with full support from the Mayor and Board of Alderman. However, they lack financial resources. Funding the reforestation effort and getting the desired variety of species will cost $50,000. A fundraiser for the effort attracted few attendees, and Peanut stated the “hickory-smoked” barbecue was good and laughed that nobody caught onto the symbolic benefit of hickory for smoking meat.

“They never see the forest for the trees in these governmental functions,” he chuckled. To your shock, Peanut said that Breakfast House representatives met with him, and they are excited about Oxford, but he worried about their approach to the authorities, indicating bold new designs and a flashing neon sign. He didn’t introduce the representatives to the Mayor but he is trying to help them out. He also mentioned that he is working with another similar restaurant firm for an Oxford site, so competition is increasing. You can almost feel the buyer’s interest in the air.

While eating chicken on a stick, you ponder what is going on and how to maneuver the Oxford minefield, and more particularly, if Peanut told the competitor about Downhome, but then realize that the tweeting storm told everyone, so no surprise here and probably the result of where the present conditions stand. But more importantly, if you don’t succeed, you can kiss your “above average” rating goodbye, and anything approaching “exceptional” would be impossible, ruing that you will never get to join the elite Presidents Club.

After some reflection, you decide it would be best to again seek advice from the banker, Ernest Smith, who seemed well informed. While waiting to meet Smith, you are shocked to see Jimmy Reed, wearing a large Texas-style cowboy hat, emerge from the office. The banker introduces you as a Downhome representative. You tell Jimmy how excited you are to meet him and that you heard all about his family back to the 1800s in Oxford. Smiling ear-to-ear, Jimmy gave you even more historical context and more information about his ancestors. He greatly appreciated your kind words, stating that few people know what his ancestors have done for Oxford.

When you ask about the two-acre West Jackson lot, Jimmy says that Ollie, who was resistant, died, he and his brother will now consider offers – have been reluctant in the past as it wasn’t desired by Ollie. They told everyone interested, including real estate professionals via newspaper advertisements to bring Ernest Smith offers on or before October 26 at 3 PM in sealed envelopes as part of an informal process, 30 days away. They will open them and decide which offer is best and the “overall forward plan,” but doesn’t want any brokers involved unless the buyer pays the fee, as he would rather not deal with them. He and his brother will discuss the best offers and seek the advice of Smith the banker.

He said bidders will sit outside and he may call a few backs into the banker’s office for clarifications, and laughed when the banker said it can be quite the circus as nobody brings early bids because they fear he will open them – they just wait in the lobby to see who else shows up and what is going to happen. Thanking him, you mention how honored you were to meet him, to which he yells, “Go Rebs.” He reminds you that he eats waffles at the Starkville Downhome, and it is his favorite breakfast location, but don’t tell his brother who loves the Houlka, and he likes them with lots of butter and blueberries, which he gets at a nearby grocery, as the restaurant doesn’t offer blueberries to his amazement. He leaves for Starkville in a beat-up, 20-year-old Dodge pickup with a hungry-looking Bulldog in the back.

The banker offers you coffee in his office, as you try to recover from what just went down. Ernest said that he does not know if they will actually sell, but Jimmy has told him the process and news is out all over Oxford. The banker also offers some advice: “Be careful on your approach, incredibly careful. I will be honored if you use my bank for any banking needs in the area, particularly for lending or deposits. This is a full-service bank.” You look at him bewildered as to intent, but realizing Ernest is Jimmy’s
confidante, you thank him for his time.

You leave the banker’s office, and walk the square, gathering your thoughts. Peanut calls to say that he can represent you on the lot near the hospital. The seller granted him an exclusive listing, so he also represents the seller solely — no issues here. In Mississippi, it is customary and permitted to represent the buyer and seller both with consent as an intermediary and not a dual agency, which you learned from other transactions. They are talking to several prospective buyers for that remaining lot, and fully expect to have offers at any time but certainly within 30 days. The owner sold the other lot for cash with a signed deed, now duly recorded in the courthouse – your pulse quickens at the news.

Instructions:

1) Negotiation Plan – prepare written and professional Negotiation Plan and related strategy for Downhome Restaurants to acquire property for presentation to the president of Downhome Restaurants. The Negotiation Plan should contain per the text the elements for a wise agreement. It should be sufficient to enable a negotiator to sit at the table and effectively negotiate, explain and defend a wise outcome to win the opportunity – being the Oxford market. Reasonable length is about 9 pages completeness and critical thought in the development of the capture strategy and negotiation plan for the market entry is important as well as containing the Negotiation Plan elements and textbook concepts (Getting to Yes).

2) Proposal – prepare a simple written proposal letter for submission to Mr. Jimmy Reed at the bank which is your terms for the opportunity for his consideration. The letter will in effect reflect the summary of your recommendation to management and provide a basis for Jimmy Reed to respond. Evaluation Elements of final work product:

1. Professionally presented Negotiation Plan for management consideration.

2. Proposal to Reed has terms and conditions sufficient to make an informed seller decision and aligned with the Negotiation Plan/recommendation.

3. Proposal to Reed contains the hard and soft attributes of negotiation sufficiently to win.

4. 3D Plan recommendation is justified with supporting analysis, competitive and compelling for Reed’s consideration as a wise agreement, per text.

5. 3D Plan is content complete with quality analysis and support.

6. BATNA/ZOPA is well displayed, outlined and justified.

7. 3D plan is sufficiently mature to enable negotiation/decisions at the table, with your understanding and display in the plan of the options available to you after management approval.

8. Forward actions are complete, well understood and displayed. Enabling resources identified and used in an appropriate manner for buyer advantage.

9. Strategy, tactics and first moves established.

10. Principles and concepts from Getting to Yes is incorporated such as how to deal with emotions and the people problem, objective standards, and any positional attributes.

11. People, Interests, Options and Objective Criteria elements well displayed and considered.

If you have any questions, ask the instructor! We will discuss the case study and negotiation plan in class, but the instructor is available for discussion as desired to clarify any matter in this effort.