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Ten things you should know when negotiating.
Negotiate in this order: needs, terms, price.
Start out by drafting a list of your needs in selling the business.
Do you want a job with the new owner? Does your
nephew want to keep working for your company after it’s sold?
Do you want to continue attending the annual industry
convention on company money for the next five years?
Have a low-key discussion to discuss both buyer and seller needs
before your start talking price or terms. Then discuss
terms - how much cash versus deferred payments, stock versus
asset sale and other terms. You can't be too specific,
but both buyer and seller have a pretty good idea of what terms
they are seeking. After all of this is on the table,
discuss a price figure.
Terms drive the deal. You discuss terms first
because terms are more important than price, and terms will
have a tremendous impact on price. Don't assume price
is the key, because in 99% of deals, it’s the terms that
make or break the deal.
Do your negotiating before the Letter of Intent is issued.
The Letter of Intent states the terms and price - the two most
important things you'll negotiate. Once those are in
the Letter of Intent, the rest is details that the attorneys
will hammer out and there's not much left to negotiate on.
Don't accept a Letter of Intent assuming you will be
able to negotiate something different later.
Don't play hardball, bang the table or say things are
"non-negotiable." Contrary to movies and TV, business sale
negotiations are best carried out when they are low-key.
It's OK to set schedules for steps to be completed, but don't
issue ultimatums and unrealistic deadlines for the sake of
acting tough. Playing hardball is a good way to scare a
good buyer away. Acting like a jerk is not only
unnecessary but risks blowing the deal. Think of the
negotiations as a chess match, not a football game.
Keep emotions out of negotiation.
A seller who says, "I won't take a penny less than $2 million!"
is setting themselves up for a fall. There is always
a set of terms that can offset a lower price. There
is always a higher price that can offset non-favorable terms.
In other words, everything is negotiable.
You know it and the buyer knows it.
Let the buyer make the first price offer then reject it.
In your selling memorandum, you have listed your asking price.
But when the buyer asks, "What do you really want for
the company?" put him or her off. You want the buyer
to make the first offer. They will probably offer less
than you want, but even if they are right on, reject the first
offer by saying, "That's too low." Make them come up
with a second offer.
Keep "deal momentum" going: Try to keep the process moving
forward at all times. Keep everyone enthusiastic by
responding promptly to requests for information and to proposals
the buyer makes. Dragging out the process causes the
buyer to lose interest and move on.
Don't nitpick. Going back and forth with little
details is a sure way to irritate the buyer, run up legal fees,
and kill deal momentum. I once worked with a great
negotiator, who whenever the discussion dragged into extreme
minutia, stood up and declared, "I'm not going to pick sh*t
with the chickens !" That usually got everyone back on track.
Don't negotiate with someone who can't make a final decision.
If you lay your cards on the table to a messenger person
who can't say yes or no, but can only deliver the information to
their boss, you are giving up most of your negotiating strength.
The buyer can see your package in its entirety and chip
away at it instead of negotiating point-by-point. You
may have to meet with a second banana early in the process,
and if you do, keep some cards hidden until later.
Know your "walk away" price and terms. Keep it to
yourself, but know the point at which you'll say, "Thanks but no
thanks," to the buyer and move onto the next prospect.
Don’t waste too much time with a buyer who isn’t going to
meet your needs, terms and price.
Keep some say in drafting the purchase agreement.
It’s customary for the buyer's attorney to draft the purchase
agreement, and that saves the seller some money in legal fees.
But you may lose that and more by having to negotiate
out a bunch of subtle land mines the buyer's attorney put in.
Either suggest that your attorney will draft the
representations and warranties section, or let them do the first
draft but be prepared to replace what the buyer provides
for reps and warranties with your own attorney’s work.
About the author: James Laabs is an experienced business
seller and author of the book The Business Sale System:
Insider Secrets To Selling Any Small Business
This Article is copyright © 2006 Business Sale Center
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