How to Negotiate on Price When Selling a Business

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Any owner can put a business on the market, but selling successfully is another story. In a typical business sale, the negotiating skills of the buyer and seller can result in dramatic swings in the final selling price - regardless of how diligently the seller has prepared the business for sale. If the seller isn't up to the task, almost all the work that has gone into the listing can be undone in a single negotiation session.

Unfortunately, this undesirable situation frequently becomes a reality for many sellers in the marketplace. The good news is that by equipping themselves with a basic understanding of the negotiation process, sellers can learn how to stand their ground and get they deserve.

The overarching principle of successful negotiation is to negotiate from a position of strength. That's sometimes easier said than done, but in today's business marketplace there are many ways for sellers to favorably and accurately position themselves before the negotiation process even gets underway.

Avoid a Distressed Sale

A stressed business is easy prey. Although sellers don't always have a choice about the timing of the sale, many times they do. Unless the business is in imminent danger of going belly up or is being forced to be sold by family circumstances such as death or divorce, sellers should plan for the sale far in advance and be prepared to list it when market conditions are ripe.

Leverage Valuation

The valuation process is designed to provide a rational basis for the selling price. Sellers who throw together a flimsy, guesswork valuation at the last minute automatically put themselves at a disadvantage during negotiations.

Create a Bidding War

Almost everyone knows someone who sold a house above the selling price because more than one buyer expressed interest at the same time. It's possible to create a similar scenario in the sale of a business, but to do it the seller needs to maximize the attention the business receives in the marketplace.

One of the best ways to maximize exposure is to list the sale online. The majority of business buyers conduct their search themselves, and increasingly, the place they do so is on the internet. By listing online, sellers have the ability to customize their listing in ways that can make it truly attractive and boost visibility to stir up competitive interest among buyers, all of which can give the seller the ultimate upper hand in negotiations.

Be Patient

Patience may be a virtue, but when it comes to selling a business it's also a necessity. The owner of a well positioned business should have the ability to wait until the right buyer - and the right price - comes along. If the business absolutely must be sold in a short time period (six months or less), then the sale begins to exhibit the qualities of a distressed sale and the seller will be at a significant disadvantage in negotiations.

The patience factor really comes into play during negotiations when it impacts who wants the sale to happen more - the buyer or the seller. Even though the seller may be anxious to seal the deal, the person who appears to want the sale to happen the most is at a disadvantage.

As more business owners seek to sell their businesses on their own, negotiation skills will continue to become more and more critical. The better sellers can prepare in advance and stand firm on the terms they desire, the greater success they'll have for a smooth and satisfying sale.

Plan Ahead and Avoid These Four Common Mistakes of Selling Business

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If you are looking to sell your business, chances are you are not alone. Now a latent supply of owners who were waiting for their business to become profitable again are beginning to emerge and are looking to sell. This influx of sellers can result in a crowded marketplace, which means sellers have to be on top of their game to get the best price for their business.

As a rule of thumb, the best businesses command the best valuations, no matter how crowded the marketplace. But with competitive pressure from other sellers, there is little room for mistakes. This guide will help you avoid common mistakes that can derail a business sale.

Mistake 1: Not Properly Preparing Your Business for Sale

 

Before buyers sign on the dotted line, they will research your business as they would any other big purchase. Sellers need to be prepared to demonstrate that the worth of their business matches the selling price. This means keeping your financial records in order. Good record keeping is a simple way to establish buyer trust.

Be sure to resolve any outstanding issues that could derail a sale, like legal issues or unfilled key management positions. If your business is struggling, focus your efforts on restoring it to profitability and constructing a plan for continued success. A detailed strategy can give you a much higher chance of attracting the right buyer and making a sale happen.

Just as important as the paperwork, don't forget the physical elements of your business as well. Consider upgrading technology, establishing and documenting key processes and even sprucing up your interior - the physical appearance of your business is often the first impression the buyer gets, so make sure it's a positive one.

Mistake 2: Not Understanding the Market

Selling at the right time and for the right price is much easier said than done. It is important to work with your business supervisor to grasp the current state of the market and what that means for the sale of your business. It is important to price it appropriately. The goal is to set a price that will attract a number of serious buyers and yet allow you to close the deal at the highest possible sales price.

To properly price your business, you will need to know where it stands in the market as compared to others. So, work with your business supervisor and conduct some research to determine where your business stands in the current marketplace, and then price accordingly. Business owners who plan ahead and take the time to research the market will stand out from competition, thus resulting in more offers and a heftier sale price in the end.

Mistake 3: Not Getting the Word Out

With more businesses coming on the market this year, it's important to get the word out and market the sale broadly to attract the greatest number of potential buyers. Listing online can help in this endeavor, allowing more potential buyers to see your listing and generating greater demand from potential buyers. The more buyers that know about your business, the more offers you are likely to get.

Higher demand for your business translates to a higher sales price, so the goal is to create a multiple buyer situation. Don't limit your focus to just one or two potential buyers or the first buyer to make an offer. Instead talk to multiple qualified prospects at the same time to continue generating a sense of urgency and demand for your business. Also, speaking with multiple buyers can help generate a backup plan in the event that the primary buyer is forced to withdraw from the sale.

Mistake 4: Not Offering Seller Financing

To close a sale in this economy, business buyers and/or their lenders are almost certainly going to require some form of financing to purchase a business. While lending from local and national banks continues to loosen, the progress is still slow, and most banks require seller financing as part of any deal they fund. This means you will be required to take a minimum of 30 percent of the sale price in the form of a note that the buyer will pay back over time, with interest. Essentially, you still have an investment in the business even after the sale, meaning you are expected to participate in a successful transition to the new owner.

This confidence and willingness to invest in your business even after a sale will encourage potential buyers, and their lenders. Furthermore, it will help you close your sale and ensure the new owner's success, maximizing the chance they will be able to complete their long term payments.

Negotiating Your Way to a Great Deal

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When it comes to buying a business for sale, the most exciting and anxious moments can be experienced when the time arrives for you to enter into negotiations and made an offer. Just like every other aspect to the buying process, your preparation will determine your level of success.

Negotiating involves many independent personality issues. When dealing with a seller you must bear in mind that this is a very emotional time for them. They are looking to sell a business that has benefited from their hard work and sweat. It can be quite a personal adjustment for many and they do become irrational. They often feel as though they are losing a part of themselves. Be sensitive to their emotions but never at the expense of fabricating a good deal for you.

Find Their "Pain," Soothe It and You Win!

Everybody has their "hot buttons" in a deal. These are the points that, in the mind of the buyer or seller, will make or break the deal. Once you identify them and can find a way to ease their concerns, you'll win. It works all the time.

The former method is usually more effective only because you can read into a variety of issues once you see the structure of a counter offer. However, asking them directly is a very accurate way to measure this as well.

Get as close as you can to their figure but, in exchange, get reduced interest rates on the balance of sale, extend the first payment to 60, 90 or 180 days after closing, negotiate the first year without interest, include the ability to payoff the note at anytime without penalty or to make periodic lump sum payments towards the principal. There are tons that you can do once you know their pain.

Preparation is The Key To Successful Negotiating

The average purchase agreement has over fifty individual clauses to be negotiated. There is far more involved than simply agreeing upon the price, down payment and terms.

Structuring The Offer

The offer will, in most cases, begin the ball rolling on a potential acquisition. At times, this is the most effective way to gain insight into the guts of the business. You may also be dismayed to learn that you may in fact have to make an offer without all of the data that you would like to have. As an example, you may only gain access to the true financials after an accepted offer has been put forth.

This is fine; no need to panic. You may be asking: "how can I formulate an offer without all of the information?." A good question in theory, but this is not always reality. Consider the fact that sellers may be exposed to an onslaught of buyers and, not knowing which ones are serious, they may choose to hold back certain information.

On the other hand, don't be ridiculous. Table something that forms the basis of a future meaningful conversation. Your offer is, to a certain extent, a tool to prod the seller into playing his or her hand and to get them to demonstrate their pain; the areas that are fundamental to the deal - from their perspective.

There's nothing wrong if they are insulted. They may or may not be, and you can always refine your offer as the case may be. Additionally, a buyer's value of the business will certainly differ from a seller. That's where negotiation comes into play. There are no hard rules for what the terms of your offer should be. Each situation is different. While it's not advisable to make unlimited offers expecting one to catch on, you must make offers. Don't over engineer each potential acquisition. 

Once a business is of interest, you've done your homework and you determine that you would, under the right conditions, like to buy the business, get your offer in.

Generally, once an offer is accepted, you will have a certain number of days to perform the financial due diligence. Allow yourself enough time to conduct this.

Lawyers, Accountants and Business Supervisors - Everyone has an Opinion

Lawyers cannot negotiate your deal for you. They can certainly help to ensure your protection from potential liabilities but when it comes to negotiating the actual business deal, they are definitely not the ones to act on your behalf. You'll want to hear their point, but their input should be reserved for the areas in which they are experts: the legal aspects of the deal.

As for accountants, they too have their role: the input from a financial point of view and tax consequences. Leverage their expertise as well, but do not let them influence the actual business deal.

Business supervisors will stay by your side right from the beginning to the end of transaction and gives you valuable feedback along the way to avoid pitfall.

The Last Word

Great negotiators are not born; they evolve. Your effectiveness will increase over time. Be creative. Be reasonable. Keep the end result of putting a good deal together in your mind. Don't lose patience. Don't be confrontational. If there is tough news to deliver, let your business supervisor do it.