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How Do I Negotiate The Terms Of A Business Sale?

Selling your business is more than just a financial transaction, it involves understanding, strategy, and above all, negotiation. The sale of a business is not one negotiation, but a series of negotiations - from negotiating the Memorandum of Understanding or term sheet to the final Sale and Purchase Agreement and closing. There are often unexpected negotiations as well, such as a currency exchange fluctuation or loss of a contract, which changes the value of the company. Negotiation is therefore one of the key competencies required for anyone selling a company, particularly for M&A professionals. By practicing basic negotiation techniques, you lower the risk of “leaving money on the table.”

Numerous strategies exist for negotiating a deal. These strategies encompass adjustments to pricing, alterations in the deal's structure, and the inclusion or exclusion of supplementary assets.

Negotiating Techniques

Negotiation in selling a business is not merely about haggling over numbers; it’s about finding a common ground that benefits both parties. The terms you agree upon can have long-lasting implications, not only for your financial well-being but also for the legacy of the business you’ve built. Thus, approaching negotiations with a clear understanding of the stakes involved is paramount.

Understand Your Buyer

If you apply the negotiation techniques well, but fundamentally misjudge character, you may win the negotiation battle (e.g., close your deal), but lose the war. Therefore, before negotiating key points, get to know the buyer and what they are looking for. Asking them questions will help you determine whether this is the type of person or investor to whom you’d want to entrust your company.

Ask yourself the following questions:

  1. Are there risks to selling to this particular buyer?
  2. Are they likely to honour contractual agreements, such as for deferred payment?
  3. If you apply the negotiation techniques well, but fundamentally misjudge character, you may win the negotiation battle (e.g., close your deal), but lose the war.
  4. What makes the buyer tick?
  5. Why does he want to invest in your company in particular?
  6. What are their emotional drivers?
  7. What are their thoughts on the timing of the transaction?
  8. Have they acquired businesses in the past?
  9. What is their internal decision-making structure?
  10. Who really calls the shots?

Define Your Ideal Terms

Clearly define what terms you consider ideal for the sale during negotiations. This includes the purchase price, payment structure, transition period, non-compete clauses, and any other relevant conditions. Knowing your bottom line and your preferred terms will give you a strong foundation to negotiate from and prevent you from making hasty decisions under pressure.

Let Your Negotiating Partner Make The First Offer

Always encourage the buyer to make the first offer, on any issue. This will not only gauge their perceptions and valuations but also leaves room for unexpected surprises. And these surprises can be delightful.

Imagine realizing that the buyer’s valuation of your company exceeds your own expectations. This situation isn’t just a confidence booster; it offers a tactical upper hand. With a higher starting point, subsequent negotiations around business selling terms may also skew in your favor.

When Initiating an Offer, Start at The Peak of Your Valuation

However, if you must make the first offer, make it at the high end of the estimated value. For example, if purchase price is what you are negotiating, start with the highest price you could conceivably defend for the sale of your company. This not only gives you room to negotiate downwards if needed but also sets a tone of valuing your business highly.

Concede In Small Increments

Concede in small increments to let the buyers know that there is little room for negotiation. This reinforces your business’s worth and helps buyers recognize the seriousness of your offer, understanding that they can’t expect large concessions or drastic reductions.

Silence Is Key

There’s an old saying in negotiation circles – “He who speaks first, loses.” Silence can be unsettling. It nudges people to fill the void, often revealing more than they initially intended or conceding to terms just to move past the discomfort. By mastering the art of staying silent at strategic moments, you can gain a psychological edge, steering the negotiation in your favor.

Be Timely

Hurrying through a deal isn’t a good idea. If a buyer thinks you’re in a hurry, they might try to pay less than what you’re comfortable with. But waiting too long is also not good. Slow negotiations often lead to deals falling apart.

Avoid waiting too long or giving in too early by agreeing on deadlines for each step of the negotiation. This way, you both have enough time to think about the deal and discuss it without pressure.

Decide When to Say No

While your goal is to finalize the sale, there might be instances where the terms offered don’t align with your needs or expectations. It’s important to recognize when it’s best to walk away from the negotiation table. Holding onto your business or exploring other options might ultimately lead to a more favorable outcome.

This concept is often referred to as The Best Alternative to a Negotiated Agreement, or BATNA, and it outlines your course of action if a negotiation falls through.

Partner with Robbinex

There are dozens, if not hundreds, of points that must be negotiated when selling a business, in addition to price: scheduling of payments, representations and warranties, salary packages, non-competition agreements, to name a few.

It is always a good idea to hire a professional and reputable M&A Intermediary/Business Broker to assist you with negotiating the sale of your business. Robbinex has almost 50 years of experience helping business owners to make the right decision, at the right time, for the right reasons.

Author: Robbinex

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