Ten things to know when negotiating the sale of your business
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 you 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 need to 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 percent of deals, it’s the terms that make or break the deal.
Do your negotiating before the Letter of Intent (LOI) is issued. The LOI states the terms and price — the two most important things you’ll negotiate. Once those are in the LOI, the rest is details that the attorneys will hammer out and there’s not much left to negotiate on. Don’t accept a LOI 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 real price offer. In your selling memorandum, you have listed your asking price. But when the buyer asks, “What do you really want for the company?” answer in general terms or repeat the asking price as listed in the selling memorandum. You want the buyer to make the first real offer. They will probably offer less than you want; if so, 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.
Bob Wolter is Mergers & Acquisitions Advisor of Creative Business Services/CBS-Global.
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