When you have built your business to the stage of being able to sell, it can be a very interesting time for a business owner. After all those years of blood, sweat and tears, you will want to get the best possible price for your precious asset. This is when you need to know how to negotiate with buyers. We have put together some preparation guidelines as well as tips from experts.
The fundamentals of a deal
Receiving and pondering the submitted offers is an exhilarating time for a business owner. Submitting, receiving, assessing and responding is a normal part of negotiations, and a business owner should expect at least two rounds of this. If the back-and-forth goes on for too long, you may need to call it quits and look for a new buyer or reassess your company valuation.
Usually, a business broker or two are involved, and they are legally obligated to hand all offers and counter-offers to the seller and buyer. However, if you have deal-breaker conditions, then you may opt to give your agent the proxy to refuse offers if they contravene the deal-breaker conditions so that your time is not wasted. However, it is generally a good idea for you to read all the offers (or counter offers if you are the buyer) as there may be positives in the offer that you had not considered.
Your evaluation of your business will be subject to its assets, goodwill, motivation for selling and market pricing for similar businesses.
You might be driven by a financial or personal need to get a quick sale as you want to start another lucrative business to plug a gap in the market or to retire, etc. Therefore, you may weight this factor more heavily when valuing your business. Conversely, if your next venture is dependant on you achieving a certain sale price, you may push up the value a bit and not accept offers below your deal-breaker price limit.
Pressures such as marriage, birth, emigration, retirement trips, divorce, partnership failure or family death are common triggers for a pressurised sale. It is vital that the buyer does not get wind of this.
Doing a fair amount of research throughout the market will arm you with valuable business value knowledge within your local area and your industry. This knowledge will help you confidently assess your business value and boost your confidence during negotiations. Market pricing also lets you know what the market appetite is for businesses like yours at the point in time.
Questions to ask to strengthen your negotiating position
Here are some questions to work through to bolster your negotiating position and strategy.
How ready is your prospective buyer?
Serious buyers usually ‘arrive’ at the negotiation table, virtual or otherwise, with a prepared first offer. If they have not assessed the value of the business and the amount they are willing to pay, how serious are they?
Is the buyer using a broker?
This is another indication that the buyer is seriously in the market for a new business and their offers will be more professionally put together. The negotiation process will also be smoother.
What are the buyer’s circumstances?
Is the buyer’s proposal subject to the sale of another of their businesses? Do they know your industry? Will they be able to operate your business, hence increasing/decreasing the chance of your staff’s continued employment? Is their offer backed by solid financing? At what speed does the buyer want to move, and does it match your timelines? How flexible is the buyer?
Value of the deal
Is the first submitted offer decent and reasonably aligned to market prices? Or is it drastically below the deal-breaker price you set with your broker? Do you need a certain price to be achieved to finance your next move in life? Is the price lower than anticipated by the timing, and other positives outweigh the deficit?
What is your agent’s opinion?
Before responding to the offer, get your agent’s thoughts on the minutiae of the offer. Are they of the opinion that the buyer has offered their maximum, or do they think you could wrangle a higher price or higher value out of the buyer? They might think it is a waste of time to do a counteroffer and recommend that you move on to the next buyer rather than flog a dead horse.
Keeping the latter in mind, what interest have you received from other suitors and how keen were their offers?
If the price or value is of interest, does your broker think the buyer is structured and driven to see this deal through, or does the buyer have their fingers in many pies? If the latter, you might be left high and dry halfway through a deal after rejecting other offers.
What to do when you receive a buyer’s offer
Don’t let the excitement of the moment cause rushed decisions. Evaluate each offer with an open mind, sleep on it and even if the price is below your target, look for compensating positives. You wouldn’t want to reject a deal that looked below par in the short term but delivered big in the medium term.
Whilst avoiding a rush decision, you also don’t want to take too long to respond. The buyer is also usually keen to take the next steps, so a response within two days will keep their interest on the boil.
You are never obliged to accept any submitted offer even if your price is met. If the buyer’s offer is great but they cannot proceed because they are awaiting a sale or are taking long to accept an offer on their saleable asset, you can move on. In fact, it is advisable to keep sourcing serious buyers until the money is in the bank, literally.
If multiple bidders are knocking on the door with multiple counter offers, a business broker might propose a sealed bid process. In this instance, each interested party is notified of a submission deadline for their ‘best and final’ bid. You then review them all simultaneously and choose the one that suits your needs.
What happens when an offer is accepted?
Your business broker will draw up a Memorandum of Agreement (MOA) when you have chosen the successful bidder. This MOA confirms the seller and buyer’s details, as well as the legal professionals involved. The business is then in the phase of ‘sold subject to contract’, and the actual transfer of ownership only occurs when the legal teams have drawn up legally binding documents, which are reviewed, amended and signed by all parties.
Tips from industry negotiation specialists
There are very few business owners who buy and sell businesses regularly. That is why when it comes time to sell yours, it can feel like a nerve-wracking or overwhelming time. It is also not in everyone’s nature to haggle with a buyer to negotiate up to the best price possible.
You must remember that your negotiations, attention to detail and strategic thinking will determine the success of your sale and, therefore, lay the foundation for the funding of your next phase in life. That is a pretty important life phase to be navigating through. As with all big-ticket life events, it is advisable to have the best professional help on hand that you can afford. This sets you up immediately for a more successful outcome than trying to fly solo through a complex business process that you have never dealt with previously.
Research and preparation will help you be a more effective client for the business broker and will result in a less stressful experience. To help you even further with this, we have picked our eleven favourite tips from industry negotiation specialists. Happy selling!
Do a thorough evaluation of your business so that you are prepared with data, statistics or strategies to justify the pricing level that you have set. Convincing the buyer of a value that they have incorrectly assessed could drive their price up versus passively rejecting an offer and moving on.
Whilst this may seem obvious, it needs to be repeated: do not accept the first offer submitted.
A prepared buyer will always place their first offer at the lower end of the price scale. Your role is then to counter this price with the above mentioned information, statistics, data and strategies. The better prepared you are for a negotiation, the better your chances are of a deal that suits you more than the buyer.