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Negotiating Your Way To A Great Deal
By Richard Parker, President of The Business
For Sale Buyer Resource Center™ and author of
the most widely used reference resource and
strategy guide for buying a business for sale –
How To Buy A Good Business At A Great Price©
When it comes to buying a business for sale,
the most exciting and anxious moments can be
experienced when the time arrives for you to
enter into negotiations and make an offer. This
part of the process completely handcuffs some
individuals. There's really no need for this to
happen. Just like every other aspect to the
buying process, your preparation will determine
your level of success.
Keep in mind that this should be an enjoyable
and educational part of buying a business. There
is much to be learned during this phase. You
must also realize that negotiations will evolve,
and so if you approach it with an open-minded
strategy instead of a “take it or leave it”
philosophy, you will ultimately perform much
better and produce a stronger deal.
Likewise, you should also know this is the
stage when many deals come apart and never
recover. Most of the time this happens because
of the inability of one or both parties to truly
understand what it takes to get the other side
to see their point. Or, a failure to address the
other party's concerns in a way that protects
your specific interests.
Negotiating involves many independent
personality issues. When dealing with a seller
you must bear in mind that this is a very
emotional time for them. They are looking to
sell a business that has benefited from their
hard work and sweat. It can be quite a personal
adjustment for many and they do become
irrational. They often feel as though they are
losing a part of themselves. Be sensitive to
their emotions but never at the expense of
fabricating a good deal for you.
Your personality traits will come to light as
well. Do your best to understand yourself. If
for example, you're not a patient individual,
then you must train yourself to avoid giving in
on a certain point simply because you're tired
of discussing it. You're better off to move on
to something else and come back to it with the
seller.
Find Their “Pain,” Soothe It and YOU
Win!
Everybody has their “hot buttons” in a deal.
These are the points that, in the mind of the
buyer or seller, will make or break the deal.
Once you identify them and can find a way to
ease their concerns, you'll win. It works all
the time. As an example, if the seller wants to
be certain that they walk away from the deal
with a specific amount of money in their pocket
after broker commissions, paying debt, etc.,
then the down payment amount of the deal is
clearly their “hot button.” There are two ways
to determine this: put in an offer and see where
and how they counter or, ask them pointedly:
“what's more important to you, the down payment
amount or the purchase price?”
The former method is usually more effective
only because you can read into a variety of
issues once you see the structure of a
counter-offer. However, asking them directly is
a very accurate way to measure this as well.
Getting back to our example, if it's the down
payment then it's your turn to leverage the
deal. Get as close as you can to their figure
but, in exchange, get reduced interest rates on
the balance of sale, extend the first payment to
60, 90 or 180 days after closing, negotiate the
first year without interest, include the ability
to payoff the note at anytime without penalty or
to make periodic lump-sum payments towards the
principal. There are tons that you can do once
you know their pain.
An associate of mine who is an excellent
negotiator always says that you should make, and
get, concessions. In other words, whenever you
agree to something, get something in return. It
always works.
Preparation is The Key To Successful
Negotiating
The average purchase agreement has over fifty
individual clauses to be negotiated. There is
far more involved than simply agreeing upon the
price, down payment and terms. You will have to
deal with the specific assets to be included,
non-compete clauses, lease assignments,
inspection period, adjustments, employee issues,
liabilities, and on and on it goes.
Play "What If"
Think about the specific point to be
negotiated, what your position is and what your
rebuttal will be to the seller's comments. Play
the “what if” game prior to sitting down to the
table.
Layout the various points, giving
consideration to what the short-term and
long-term impact will be of your decision. As an
example, if you negotiate finance terms with the
seller that call for one lump payment down the
road (i.e. a “balloon payment”) you must also
consider that the business MUST be able to make
that payment at that time. What if there's a
cash crunch? What if you'd like to use the funds
for something else at that time? What if… you
want to balance that with a straight-line
finance program so that you'll know what your
obligations are every month and you can budget
accordingly. Every situation is different, but
again, give consideration to the impact today
and down the road.
Structuring The Offer – and Remember,
It's YOUR Offer!
The offer will, in most cases, begin the ball
rolling on a potential acquisition. At times,
this is the most effective way to gain insight
into the guts of the business. You may also be
dismayed to learn that you may in fact have to
make an offer without all of the data that you
would like to have. As an example, you may only
gain access to the true financials after an
accepted offer has been put forth.
This is fine; no need to panic. You may be
asking: “how can I formulate an offer without
all of the information?.” A good question in
theory, but this is not always reality. Consider
the fact that sellers may be exposed to an
onslaught of buyers and, not knowing which ones
are serious, they may choose to hold back
certain information.
The offer you present is YOUR offer. You
should be comfortable tabling any terms that YOU
are comfortable with. Whatever the seller is
“asking” is simply a guideline. Remember, it's
an “asking price,” not a purchase price. On the
other hand, don't be ridiculous. Table something
that forms the basis of a future meaningful
conversation. Your offer is, to a certain
extent, a tool to prod the seller into playing
his or her hand and to get them to demonstrate
their pain; the areas that are fundamental to
the deal - from their perspective.
There's nothing wrong if they are insulted.
They may or may not be, and you can always
refine your offer as the case may be.
Additionally, a buyer's value of the business
will certainly differ from a seller. That's
where negotiation comes into play. There are no
hard rules for what the terms of your offer
should be. Each situation is different. While
it's not advisable to make unlimited offers
expecting one to catch on, you MUST make offers.
Don't-over engineer each potential acquisition.
Once a business is of interest, you've done your
homework and you determine that you would, under
the right conditions, like to buy the business,
get your offer in.
There are standard offer-to- purchase
agreements available to use. Every business
broker will have one and so too will most
attorneys. It's generally fine to use the
business broker's template as long as you add in
the conditions/contingencies particular to the
business. On this note, you always have the
option to start the offer process with a Letter
of Intent instead of a full blown Offer to
Purchase Agreement BUT, unless there are
extenuating circumstances, a full offer is a
better way to go. The one thing that you want to
be certain of is that the due
diligence/inspection clause provides you with
the right to rescind your offer at your "sole
and absolute discretion" if you determine that
the business is not what it was represented to
be. However, you cannot have an unlimited time
frame to do so after acceptance of the offer.
Generally, once an offer is accepted, you
will have a certain number of days to perform
the financial due diligence (often referred to
as the “Inspection Period”). Allow yourself
enough time to conduct this. The idea is that
you must be able to retract the offer for any
reason whatsoever right up to the last day of
this due diligence period.
There are some offer contracts that stipulate
that you cannot retract your offer and get a
refund of your deposit if the financials are
within 5% of what has been presented. This is a
ridiculous clause. Never agree to it. You must
be able to get any monies returned, for any
reason, through the due diligence phase.
Conversely, if you sign off after the due
diligence and then decide you do not wish to go
through with the purchase, the seller is, in all
fairness, entitled to your deposit.
Lawyers and Accountants and Others -
Everyone has an opinion
Let's understand one thing: lawyers cannot
negotiate your deal for you. They can certainly
help to ensure your protection from potential
liabilities but when it comes to negotiating the
actual business deal, they are definitely NOT
the ones to act on your behalf. I am certain
that any attorney reading this column will
disagree. That's OK. However, I have yet to meet
more than a handful of attorneys who
demonstrated any proficiency whatsoever in the
actual art of negotiating the deal points of a
small business acquisition. Most have never
bought a business before, so even though they
may have been involved in deals it's not the
same perspective. You'll want to hear their
point, but their input should be reserved for
the areas in which they are experts: the legal
aspects of the deal.
As for accountants, they too have their role:
the input from a financial point of view and tax
consequences. Leverage their expertise as well,
but do not let them influence the actual
business deal.
The Last Word
Great negotiators are not born; they evolve.
Your effectiveness will increase over time. Be
creative. Be reasonable. Keep the end result of
putting a good deal together in your mind. Don't
lose patience. Don't be confrontational. If
there is tough news to deliver, let your broker
do it. After all, you will need the seller to
provide you with training.
Learn from each experience. Understand that
there will be setbacks; work through each. You
cannot win every point. It's a give-and-take.
Prioritize. Prepare. Win/win is not always
realistic. A buyer is usually taking on more
risk in these transactions and so if the balance
is to tilt in any parties' favor, it should be
the buyer's.
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