According to the Webster dictionary the definition of negotiating is “ to confer with another so as to arrive at the settlement of some matter” or “to arrange for or bring about through conference, discussion, and compromise”.    This is very important to understand since many sellers believe that once a price has been agreed upon then the negotiations are over.  On the contrary, every buyer considers the escrow process a series of negotiations and it is not until the final check is written that the deal is over.  I cannot over emphasis this to a seller and please listen when I tell you that  the deal is not over until you receive the money.  Unlike selling a house, the agreed price does not end upon a signed purchase agreement.  Businesses are alive and being a business owner is a verb, not a noun.  The sale price is based upon  information provided by the seller and yet to be verified by the buyer.  Even if everything you stated in the offer letter is accurate, the business climate might change, employees might leave, and financing availability might adjust among a host of other changes that could affect the sales price.

This is not an opinion but a fact so what should you do about protecting your sales price now that you have a potential buyer?   The key to a good negotiation is first admitting to yourself that you will have to compromise or settle on things even though many self-made entrepreneurs are not known to have this personality trait.  Don’t come in to the meeting with a potential buyer listing all your demands and suggesting that none of them are negotiable.  The deal has to be a win/win and the escrow process could take 6 months, so finding a buyer you can work with is key to a good negotiation.  There are three areas that you will need to be prepared to negotiate in the selling of your business and they are your wants (some might call needs), the terms and finally the price.

Your wants are things like your role in the transition and if you want to continue working for the new company, the timing of the escrow close, how much financing your willing to provide, what personal assets go with the deal (like a vehicle, lap top, art work, etc), how the due diligence process will work, when you tell the employees, etc.  It’s key to lay down the general guidelines  upfront to see if either of you have a problem with the format.

The terms of the deal are where money is made and lost.  This is where professionals can earn their money depending upon how good they are.  Please be aware that it is the terms negotiations that blow most deals up, not the price when it comes to selling a business.  A quick example is if you and I agree on the selling price of $1,000,000 for your business, (great and awesome) but I want to pay you $100,000/yr for 10 yrs, will you take it?  What if I offer you $50,000 for 20 years or $10,000 for a hundred years?  Where is the breaking point for you?  The terms are not only limited to financing, but also many deals have an “earn out” clause that mean that the new business must hit certain sales numbers in order to pay the full value.  There are also closing costs allocations, loan payoff amounts, key employee contingencies and many more.  Just be aware that you need to manage the terms of the deal and that is usually performed in a LOI (Letter of Intent).

Finally, negotiating the price should be the last step since the wants and terms will affect the value.  Remember the sales price takes into consideration the market as well as your ability to sell it.   Don’t forget that you have closing costs, professional fees and the always present silent partner, taxes, to take out of the sales price before you get to take anything home.  There are numerous valuation tools online and business comps of other sales but there are no two businesses that are similiar.  Finding a sales price is a negotiating skill and remember not to nitpick a potential buyer over small details.

Finally, know when you will walk away from the deal before you get into the negotiations.  There will be a point in every deal that you have to say “enough is enough and no thanks.”  Not every buyer is the right buyer and your goal is to not waste too much time with buyer’s that doesn’t come close enough to your terms.  Be honest, willing to negotiate and you could be one of the lucky 20% of business owners who sell their business.

This entry was posted on Tuesday, October 27th, 2009 at 11:43 am and is filed under Strategic Advisors, Selling a Small Business, Sell Your Business, Exit Stories, Emotional Selling, Exit and Answers, Buy a Business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.