Negotiation is an Art, a Skill, and a Risky Business if You’re not Experienced.
When you’re selling your business there are literally dozens of factors to consider, some tangible and some intangible. The first is usually price, and then there are things like a timetable, special considerations, addendums, exclusions, etc.
But the actual transaction is rarely just a written offer followed by acceptance. There are negotiations.
“In Business as in Life – You Don’t Get What You Deserve, You Get What You Negotiate” – Dr. Chester Karrass
Early Preparation and Flexibility are Critical
If you’re planning to put your business up for sale in a year, don’t wait 11 months to start planning! Begin listing goals, plans, and things to do early, and one of those things on the list should be to contact a valuation expert who has vast experience selling businesses to many different types of buyers.
Selling your business involves strategies, and you should have different outlines for different types of buyers. For example, if you’re selling widgets to farmers, it’s possible a new buyer would like to sell modified widgets to boaters. Can your operation handle this? What other variations on your current business model are there? The key is to make your business as valuable as possible to the largest number of potential buyers.
What is the business worth to you? What is the business worth to buyers?
Understanding these two concepts is essential, and must be in the skill set of someone helping you price your business and assist you to sell your business.
You’ll want to think as a potential buyer might think. A shrewd buyer will vet the market prior to making an offer in writing. He or she will have examined revenues and profits for similar companies, studied trends in the marketplace, and analyzed sales prices for similar transactions. You should know all that as well. Will the buyer have synergies you do not have? If so, the business may be worth more to the buyer than to you.
You need to understand what’s known as the valuation drivers: factors that add significant value for which buyers use to price the business. This includes revenue streams, tangible assets and intangible assets (e.g. customer base) that are specific to each business. Remember, assets that are valuable to a seller may not be valuable to a potential buyer.
Many sellers think an appraisal is all they need to prove the value of their business and they will hold on to it for dear life, refusing to budge from the number on the bottom line. This may or may not a valid tactic because it depends on the quality of the appraisal and what is known as the standard of value.
- Who prepared the appraisal? Is it thorough and specific? What are his or her qualifications, education, and experience?
- The standard of value in an appraisal is “Fair Market Value” which is the price, the business would change hands between a hypothetical willing buyer and a hypothetical willing seller. What a seller should consider is the value of the business to a specific buyer and the value of the business to him or her as the seller. Almost always an appraiser’s Fair Market Value is different from the value to the seller which is different from the value for a specific buyer.
Keep emotion out of the negotiations
A shrewd buyer may use emotion as a tactic to get you to lower your price or commit to seller financing that you’re not interested in accommodating. Assuming this is an arm’s length transaction and you don’t know the buyer, it is usually best to avoid feeling sorry for buyers if they tell you a hard-luck story. Nothing personal, it’s strictly business.
A Valuation Expert
Prior to negotiations, use the valuation expert to identify the valuation drivers, estimate the business value to the seller and estimate the business value to specific buyers.
Using an experienced broker may also be prudent, but it is important to distinguish the broker’s role and the role of your valuation expert, as well as your own function in the negotiations. Clearly define in advance the specific duties and the powers each member of your “team” has and does not have. You may not want a broker making verbal promises or stipulations that can come back to bite you later.
Know your strengths and weaknesses and get professional help wherever necessary to price the business and negotiate the sale of what may be the most valuable asset you ever own. In the end you want to have no regrets.