Negotiating Price When Selling Your Business
Any owner can put a business on the market but selling successfully is another story. With thousands of dollars hanging in the balance, today’s do-it-yourself sellers need to learn the fine art of negotiation.
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.
The good news is that by equipping themselves with a basic understanding of the negotiation process, independent business sellers can learn how to stand their ground and get every dollar 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 market, there are many ways for sellers to favorably and accurately position themselves before the negotiation process even gets underway.
Avoid a Distressed Sale (If Possible)
A stressed business is at a significant disadvantage. 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.
This often means a concerted effort to reduce expenses and liabilities and to increase market share in the years leading up to the sale. Faced with the evidence of a thriving, top-shelf establishment, buyers will have a difficult time arguing for anything less than the business’s actual value.
Leverage Valuation
The valuation process is designed to provide a rational basis for the asking price. Sellers who throw together a flimsy, guesswork valuation at the last minute automatically put themselves at a disadvantage during negotiations.
FSBO sellers are better off using an experienced and reputable valuation professional. BizBuySell’s Valuation Report is also a great starting point. Expert valuation is an added expense, but it more than pays for itself because it gives the seller a stronger leg to stand on when the buyer tries to poke holes in the asking price. It also gives the seller confidence in the asking price and increases his or her resistance to buyer demands. More on this topic can be found in our article, “Choosing a Business Appraiser”.
Keep Your Emotions in Check
When it comes to successfully negotiating the sale of a business, it’s important for sellers to put their emotions aside. This may require the assistance of your attorney, accountant, or professional appraiser. They can provide you with supporting data and information to improve your position, as well as provide you with a level of objectivity at the negotiating table.
Offer Additional Finance Options
Sellers who are willing to finance a portion of the sale are more likely to receive a sale price that is closer (or sometimes higher than) their asking price. Similarly, offering other financing options, such as having the business pre-qualified by an SBA lender, can also improve a seller's negotiating position.
Maximize the Pool of Potential Buyers
It is common for someone to sell a house above the asking 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 in order to do this, the seller needs to maximize the attention the business receives in the market.
Take the time to create a listing that sells your business for you. On BizBuySell, 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.
Consider Concessions in Advance
Sooner or later, the buyer will want to discuss the subject of seller concessions. Concession requests can include everything from seller financing, exclusion of certain equipment, or on-the-job training. Concessions can have a direct impact on the sale price, as they often require time, money or both. The worst time for a seller to determine whether he or she is agreeable to a concession is during the middle of a negotiation. At this point, the temptation to make concessions simply to close the deal is usually too high. Instead, sellers need to consider the specific concessions that are agreeable before they begin negotiating with buyers.
Obtain a Letter of Intent
Once you’ve attracted a pool of qualified buyers who see your business as an attractive investment, your goal is to get buyers to put their purchase intentions in writing. Make sure you have a signed letter of intent outlining the buyer’s proposal. This letter forms the foundation for the discussions that lead to a formal purchase offer. A letter of intent presents important information about price, terms and purchase conditions, and can reduce the potential for misunderstandings later.
Once you receive a letter of intent, give careful consideration to its finer points, including: the buyer’s proposed purchase price; purchase structure; price allocation; purchase exclusions or additions; due diligence process; warranties and representations; seller’s future involvement; and any additional stipulations. All these finer points should be reviewed with your attorney, accountant or other professional advisors before responding to the buyer.
Reaching a Deal and Accepting the Offer
The deal isn’t done until both you and the buyer reach a final agreement on the major elements of the buyer’s proposal, including price, payment structure, exclusions or additions to the sale, time frame, and your after-sale involvement. Other details can be ironed out during negotiations of the final terms. If you and the buyer differ greatly on the major elements of the proposal, then you may want to consider responding with a counter-offer. But before you respond, this is a good time to consult with your professional advisor(s). Receiving their input can help you make more objective decisions and avoid any unnecessary disputes.
Allow Time For The Process
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, then the sale begins to exhibit the qualities of a distressed sale and the seller will be at a 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.
Know When to Engage a Broker
Selling your own business is appealing to many business owners who are already comfortable with complicated financial concepts, contract negotiations, and potentially adversarial business transactions. There is certainly the potential to save money, but don't discount the risk of selling yourself short. A business broker can be a valuable asset, and for most deals over two or three hundred thousand dollars, generally pay for themselves in added value for the business seller. When in doubt, take the time to consult with a few business brokers before engaging potential buyers.