After years of making deals with customers and vendors, most business owners are well versed in the art of negotiation. However, when it comes to selling their own business, many can feel out of their depth with the high stakes and unchartered territory of these complicated, legislative minefields. But once you've prepared your business for sale, put it on the market and found a credible buyer, now's the time for the difficult bit.
While purchasers look to acquire companies at the lowest possible price, business owners seek to maximise it. Despite the tension between these two goals, buyers and sellers share one critical commonality: getting the deal done. To this end, we've pulled together some key advice to help you to negotiate the sale of your business.
Decide your place in the future company
Before anything else, you need to decide whether or not you'll choose to stay in the company after the sale. This is essential for negotiating your position within the framework later on.
Some buyers may want you out completely, while others may ask you to roll over some of your equity. This is useful to the buyer for two main reasons:
· It reduces the amount they have to pay
· It incentivises you to keep helping with the business
If you choose to stay, there should always be a clear understanding of who controls what. Seek agreement from the investor over who will be leading strategic, financial and acquisitive decisions. After the sale, it may be possible for the new investor to remove you before you are ready, so you need to have a full understanding of where you stand and be at peace with the idea of working for someone else.
Of course if an earn-out deal has been arranged, then to some degree you are still working for yourself. It is not uncommon for up to 45 per cent of the total consideration to be paid as part of an earn-out, so you need to be sure that this is the best way to be spending your time for the expected return.
Remember that an earn-out is a contingent payment which involves shifting some of the purchase price to be paid in the future. The amount paid depends upon future earnings or some other benchmark of success. As the owner you are effectively delaying some of the price and need to understand that you may never receive it!
So be armed with a realistic expectation of how the business will fare over the next 2-5 years. Ideally you will have thought about this 2-5 years before even putting the business up for sale. You want to ensure that the gap between your expectations of the company’s future performance and the buyer’s expectations of the company’s future performance is as small as possible. The smaller the gap, the easier the earn-out negotiation will be and hopefully the easier it will be to end up in a position where most or all of your earn-out is paid out to you. A good tip is to keep the number of earn-out variables as low as possible - ideally one or two maximum. Too many variables can sometimes make it very difficult to achieve the earnout. Another tip is to agree early on in negotiations exactly how progress against the earn-out’s goals will be evaluated including who will umpire it. Be wary about using Net Profit as an earn-out goal if the buyer is in control of all the cost accounting!
Research and understanding the buyer's perspective
A seller should always walk into a negotiation with a strong sense of the buyer's perspective. What are their true interests? What's driving them? Understanding the motives behind the purchase will increase your bargaining power, and allow you to enforce a more personalised negotiation.
And you shouldn't just research the seller. Research the sale.
Understand the market. Knowledge is power
Before your first meeting, research everything you can about assets and their associated value, relevant market activity and industry- comparable sales. An informed seller is one who's less likely to be taken advantage of.
Negotiating a price
Agreeing a selling price is arguably the most difficult part of the sale. It will drive how much capital you take away and how much ownership the buyer will have; it will also have some bearing on how leveraged the company will be after the transaction is complete.
Before heading into negotiations, it's a good idea to have a definite figure in mind. Getting to this number takes research, personal reflection and preparation, and sticking to it will safeguard seller satisfaction. But within these limits, you should always be flexible and prepared to compromise. Though the selling price you achieve is naturally important, other terms can make or break a deal too.
As you consider selling price, bear in mind that this is not just one number. It's an assortment of different possibilities, depending on how the buyer and seller can come to terms.
For example, a sale might include a costly replacement of all equipment. If both buyer and seller agree with this, the sale can continue. If not then be prepared to negotiate until you can reach terms you're both happy with.
Other negotiable elements may include (but are not limited to):
· Business assets
· Buildings or land owned by the business
· Stock of shares
· A non-compete agreement
Getting an outside valuation of these assets before you begin negotiations will ensure you receive a fair and balanced price.
The final price of the business is a key factor to negotiations, but it doesn't end here. As mentioned, the terms of the sale are also immensely important, and should be thoughtfully weighed into your decisions throughout the negotiation process.
For example, how is the payout to be structured? What will happen to the staff? Will an earnout provision be made?
Covenants and warranties
Covenants are defined as "promises of future action or inaction".
In a business sale, this could be a non-compete agreement, or perhaps an agreement to continue 'business as usual' during the negotiations process (that is, without making any sudden, unusual changes to how things are run).
Warranties are "statements of current and future condition".
These are promises that information provided about the business or its assets are true and correct. Warranties are sought by the buyer on areas such as whether the financial records of the business are true and complete, or an agreement that the inventory of goods and products is correct.
Whereas warranties and covenants protect the buyer, they leave you, the seller, with an ongoing liability to the purchaser after the sale has gone through. To protect yourself, make sure your warranties are defined as clearly as possible before negotiations in case any disagreements arise further down the line.
Once you have the price, terms and warranties settled, it's time to discuss transition issues.
You will need to pass over any inventory or customer work that may be in progress, contracts with vendors and how to notify these people, any hidden liabilities, etc. It's also a good idea to figure out what the situation with your current employees will be before the sale. Who will stay and who will go?
Hopefully by this time you'll have reached a common understanding on the details of the sale, and will be well on your way to finishing up a mutually favourable deal.
As negotiations continue, it's easy to lose sight of the forest for the trees. After all the time and effort spent in reaching a deal, it can be unimaginable to come away with nothing, but sometimes this is the best option.
If your minimum price isn't reached or if the deal feels uncomfortable for either party it might be in the best interests of everyone to simply walk away. Lessons will have been learned that will help you approach a sale more effectively in the future.
Being prepared is the number one key to success. If you know what to expect then negotiating the sale of your business will be much easier. Also, if anything unexpected occurs, being flexible and knowing when to take a step back and think things over before reconvening is essential.
Selling your company is a major life event and can affect many people's lives. This is why it's so important to make sure you take the time to really think about what's important to you before you start the process. You'll then be able to drive these terms into your transaction and come away with a deal that satisfies all parties.
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