5 Tips to Negotiating a Small Business Sale
Many business owners feel unprepared when it comes time for negotiating a small business sale. This is true even for business owners that spend years negotiating with suppliers, vendors and customers. Often, this is due to the emotional nature of selling their business.
It is true that negotiating a small business sale can become frustrating, especially when buyers seek a low-ball price or very favorable deal terms. But don’t fret! Remember that the ultimate goal is to close the deal. Maintaining a positive attitude and staying committed to the process can go a long way to overcoming disagreements.
To help those negotiating a small business sale, here are 5 tips to negotiating a small business sale.
1. Do Your Homework
Being prepared for conversations with buyers is key to establishing a strong negotiating position. For in-person meetings, consider setting a meeting location familiar to you. Outlining an agenda ahead of time can help set the tone and keep the meeting from wandering off track.
It is also important to get to know who you are talking to as much as possible. A little research can help you develop a better relationship with the buyer. Further, the more you know about the buyer, the better prepared you will be for what they might ask.
Likewise, anticipating questions and having answers prepared will help establish trust. The more confidence you can instill that you know the business, the better the chances you will get what you want. Particularly, you should understand your business’s specific cash flow strengths and weaknesses. These items are likely to be the most important in supporting your asking price.
2. Open-Ended Questions
The best way to learn is to listen. And the most insightful information often comes from asking open-ended questions. When you avoid questions with easy “yes” or “no” answers, you learn what is really on the buyer’s mind. And the more you learn about the buyer and their pain points, the better your negotiating position will be.
Even more significantly, the person who asks the questions drives the conversation. The more you can keep the buyer talking, the more you can learn to your advantage. Ask questions that can help you weed out potential tire-kickers so you can focus on serious buyers.
Ask This: What is it about my business that attracts you the most?
Not That: Are you only looking at buying a restaurant?
And This: Where are you in your search process?
Not That: Are you looking to buy a business this year?
Speaking of serious buyers, the more you can learn about the buyer’s financial position, the better. The last thing you want to do is spend time negotiating a small business sale with a buyer who can’t afford to buy the business. Again, open-ended questions will let you learn more about the buyer’s true financial position.
Ask This: How do you plan on financing the purchase?
Not That: Do you have financing for the purchase?
3. Strategic Concessions
Another important point to keep in mind when negotiating a small business sale is to rarely give up something without getting something in return. How this plays out in practice is truly an art and not a science. As Richard Parker, author of the “How To Buy a Good Business at a Good Price” series, discusses on his blog, not every item is critical. Instead, pick your battles and remember that the goal is to close the deal.
As a first step, you should know what you might be willing to trade away. This may be flexibility on price, but it could also be deal terms such as an earn-out, training, or a non-compete agreement. When conceding on an item, communicate that you are giving up something of value. It helps to outline the value of the concession to the buyer and ask for something specific in return.
Never say something is a deal-breaker if you aren’t willing to walk away.
Lastly, while it is important to know your pain points, you should avoid revealing them to the buyer. You never want to say something is a deal-breaker and then eventually give on it. The buyer may take this as a sign of weakness and push on other points to their advantage.
4. Maintain Momentum
Keeping a constant flow of communication with potential buyers is important to maintaining a good negotiating position. One way to do this is by having a well-defined due diligence process. Preparing and sending first drafts of critical deal documents can make sure that you set the stage for negotiations. These documents could include:
- Buyer proof of financing
- Letter of Intent
- Term Sheet
- Purchase Agreement
By establishing the first draft of the document, you can shape the deal terms toward what is most favorable to you. It also helps establish the framework for the deal, including key deal points. This is especially important given that receiving parties may be reluctant to take a heavy pen to documents.
Frequently, financing the purchase is a major cause of delays in negotiating a small business sale. One way to combat this as the seller is to pre-approve the business for an SBA loan. This can not only save time, but can also support your asking price by having financing already in place.
5. Know When to Fold
The further you get in any deal, the easier it is to give more than you should. Especially if you don’t have competing offers, it can be tempting to give a buyer whatever they want just to be done. However, as with playing poker, sometimes the most valuable skill is knowing when to fold a losing hand.
Knowing your walk-away number or terms, and sticking to them, will help you stand strong when the chips are down and ultimately get what you need from the sale. As the process unfolds and your circumstances change, what might make you walk away can change–that’s okay.
Just make sure that at the end of the day you will be satisfied with the deal you sign. If the buyer isn’t able to meet your minimum requirements, the best move, as hard as it might be, could be to pass and move on.
Following these tips can help you have a better experience when negotiating your small business sale. Remember to maintain a professional and measured approach with buyers and don’t take criticisms personally. Answering questions honestly and developing trust with the buyer will go a long way to completing a successful sale.
When you are ready for your small business sale, join Firm Exchange and start creating your listing. With Firm Exchange, you get more than just a listing site – we provide the tools and resources to get deals done. Come see how we are reimagining the way people buy and sell small businesses.
DISCLAIMER: The information contained in this article is for informational and discussion purposes only, and should not be relied upon without seeking your own professional advice. The Firm Exchange, LLC is not a law firm, accounting firm or professional services firm, and accordingly it disclaims any liability for any reliance on the contents of this article. As each situation is unique, you are encouraged to discuss your specific situation with a qualified attorney, accountant and/or other relevant professional services provider.