The Complete Buyers Guide to Selling a Business: Negotiating the Sale

Selling a business is a long and complex process. You may be ready to sell this year or just curious into what it will take to sell – this series will help. The business sale process can be broken down into core stages – from who you need to hire, to what questions you should be prepared to answer, to how to hand off your company once you’ve signed on the dotted line.

Mastering negotiation takes time, talent, homework, and practice. However, there are a few key negotiating techniques and resources that are crucial for success when closing a business investment, growth capital, or M&A transaction.

1. Remember, price isn’t everything: When it comes to the sale or purchase of a company, it’s easy to fixate on the price. It’s a key piece of the negotiations, buy hardly the only one. The terms matter too. Does the buyer get the first refusal for future transactions? Does the sale agreement provide the buyer with any recourse against the seller if costly problems arise immediately after the transaction? Is the any seller financing? By creating many terns beyond just price, buyers and sellers can find out what are the top priorities for the other side, and this allows both sides to ultimately make concessions to the other to keep the deal moving forward. Perhaps the seller is comfortable with an earn-out provided the buyer is willing to pay a higher price. If you don’t put an earn-out term on the table, the deal might be off.

2. Make Concession Strategic: According to Harvard Business School Professor Deepak Malhotra, “Concessions are often necessary in negotiation. But they go unappreciated and unreciprocated.” Malhotra offers four strategies to make sure your concessions are returned in kind.

• First, make sure the counterpart is aware that you have given something up of value.
• Second, define how your counterpart can return the favor. Then demand it.
• Third, if you don’t trust your counterpart to reciprocate, make a contingent concession. In other words, offer to yield on something only if the other side meets a certain condition.
• Fourth, make concessions on installments.

3. Know Your “Walk-Away” Number: Enter negotiations with an understanding of the reasonable range in potential sale prices for your company. Just as important, know their “walk-away number”; this number is your final threshold for consummating the deal. Knowing the walk-away number going in takes research and preparation, and sticking to it will help you stay disciplined.

4. Know Your Opposition: In order to get the other party to agree to a deal, you need to intimately know what their interests are. Also remember that there’s a distinction between your negotiating counterpart and the organization they represent. His or her compensation structure and career goals could be playing a role in their decision-making. Understand what’s driving him or her helps you increase you bargaining power.

5. Don’t Fear Sunk Costs: As negotiations progress, it’s easy to get tunnel vision. So much time has been spent and effort has been exerted, how can you walk away empty-handed? Sometimes you have to because that’s the best option. As was already pointed out above, it’s important to know you alternatives and walk-away number before you enter the negotiations.

6. Shake Hands, Then Second Guess: After the deal is done, second-guessing can be helpful. Research has shown asking yourself what more could you have done following negotiations can make you more effective. A 2009 study from professors at Haas, Kellogg, and Ohio University found that the second guessers learn more and perform more effectively in the future. Not all self-reflection is equal though. The experiments found it’s better to think about what else you should have done rather that what you did but should have avoided.

To find an advisor to help with seller negotiations, contact your local Sunbelt Business Brokers Office

Some of the information contained in this blog is from Axial Forum