After years of cutting deals with vendors and customers, most business owners have had their fair share of practice in negotiation. But when it comes to selling their business, many feel unprepared for such an important and elaborate transaction.
To an entrepreneur, selling the business typically means two things: parting with something extremely emotional and realizing the value of his or her most valuable financial asset. These incredibly high stakes make this type of negotiation entirely unique.
While purchasers seek to acquire companies at the lowest possible price and most favorable buyer terms, business owners aim to realize the fruits of their labor by maximizing the price and arranging for optimal seller terms. Despite the tension of these opposing goals, buyers and sellers share a critical commonality: getting the deal done. To that end, entrepreneurs should consider these seven key factors so as to negotiate like a pro when selling the company.
The final price of the business is a key piece of the negotiations but hardly the only one. The terms matter immensely. How is the payout to be structured? Will there be an earnout ? What's in store for the employees and senior management? All these factors should be weighed during the negotiation process.
Enter negotiations with an understanding of the range of values that an owner might expect for the company. Ultimately, the seller needs a “walk-away number” -- the final threshold that must be crossed in order to consummate the deal. Getting to this number takes research, personal reflection and preparation. Sticking to it can ensure that the seller ends up comfortable with the final deal.
Some concessions are often necessary in negotiation but be sure that they are realized and reciprocated by the counterparty. To ensure reciprocity, a seller needs to express that he has given up something of value, identify how the favor can be returned and quickly demand his counterparty do so.
To get the other party to agree to a deal, a business owner needs to be intimately familiar with the buyer’s true interests. Getting to Yes, a Bible on negotiation techniques, explained that the 1978 Camp David negotiations started with Israel and Egypt expressing irreconcilable claims to the same piece of land. Only when the two sides recognized the other’s real interest (Egypt wanted its previous borders and Israel wanted its security) were they able to realize an agreement.
Remember that there’s a distinction between the negotiator and the organization that he or she represents. Understand what’s driving him (compensation? career goals?) to increase bargaining power.
It seems obvious, but a seller should never walk into negotiation discussions without appreciating the buyer’s perspective. Research about due diligence items beforehand and understand assets and their associated value, relevant market activity and industry comparable sales to be a more informed seller, someone less likely to be taken advantage of.
Popular wisdom suggests it's best to not tip one's hand but to let the other person show his cards and make the first offer. There may be an advantage to making the first offer, though, in that it can anchor the discussions. Studies have shown that the first-named price in a negotiation significantly influences subsequent figures in the discussion. This strategy is most useful when the seller has an information advantage over the buyer. If the seller is not in that position, playing coy might be the ideal strategy to avoid lowballing.
As negotiations progress, it’s easy to get tunnel vision. After all the time and effort spent, it’s hard to imagine walking away empty-handed. But sometimes that's the best option. Defining a walk-away number and knowing alternatives to pursue can help a seller say no to an uncomfortable deal. If the seller does walk away, self-reflection might prove helpful. Asking what else could have been done rather than what should have been avoided can help a business owner learn from the process and perform more effectively in the future.
Related: Selling Your Business at Your Price
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