Negotiating Position

How important are negotiating skills during the sales process? How can negotiating skills affect the ultimate price you may receive for your business?

Negotiating is a critical component of the sales process. While you don’t need to have expert negotiating skills to successfully sell your business, you do need to be involved in the process and on the lookout for some common mistakes in order to maximize your negotiating position. What you may lack in negotiating prowess can be compensated for with preparation and positioning. Let me lay out a strategy for doing just that.

Creating Options

The best way to maintain a position of strength during negotiations is to have multiple options on the table at all times. One way to create options is having multiple buyers interested in your business. Negotiating with as many qualified potential buyers as possible will drive up the price. Also, keep in mind that the better your business is performing, the stronger you’ll appear to buyers and the more likely you’ll be able to negotiate a favorable price. 

If you’ve got one or more buyers on the hook, remember this – more than half of all transactions collapse before making it to the closing table. The lesson? Don’t lose focus on running your business just because you think you may have landed a buyer. After all, if revenues slip during negotiations, you can expect the buyer to demand a lower price. But if you keep your nose to the grindstone and revenues increase, you can expect to maintain a strong negotiating position.

Surviving Due Diligence

Many business sales fall apart during due diligence when issues are discovered. If the buyer uncovers problems that weren’t disclosed, they can end up in a unique leverage position, and you’ll lose your negotiating posture and receive a lower purchase price as a result. Make no mistake – each item the buyer finds fault with during due diligence enables them to claw back at the purchase price, if they don’t abandon the transaction altogether. 

Avoiding Deal Fatigue

Sophisticated buyers are aware of the natural tendency of business owners to experience fatigue as the process wears on. They may take advantage of this by drawing out the process and nibbling at the purchase price or terms at the last minute. If you have other options available in case the buyer attempts to renegotiate the price, you’ll maintain your strong position. The more prepared you are, the more likely you will minimize the chance buyers will discover a material fact they can use against you during the due diligence process.

The Importance of Honesty

Any buyer who believes you may be less than forthcoming will either head for the hills or triple their level of scrutiny during due diligence. They may also request holdbacks or other forms of protection, which can reduce your net proceeds. If the buyer believes you are honest, they’ll perceive your business as less risky, and negotiations are likely to be smoother as a result.

Humility also goes a long way in a transaction and is a significant factor that can affect the value of your business. Price is inversely related to risk. The lower the risk, the higher the price. Who do you trust more – a pompous, arrogant blowhard or a humble individual? The more humility you show throughout the process, the less risk the buyer will perceive, and potentially the more valuable the buyer will view your company.

Being honest saves you time and can help increase the value of your business. Building trust through authenticity and proper disclosure can reduce the intensity of the buyer’s scrutiny during due diligence, reduce the possibility of re-trading, and make negotiations less contentious. Selling a business is a protracted endeavor. It’s nearly impossible to conceal material facts in perpetuity. Your odds are slim-to-none for concealing a material defect all the way to the closing table and even less so after the closing. A sophisticated buyer will perform excruciating due diligence and is likely to discover any material facts. If the buyer uncovers a fact you failed to disclose during due diligence, you’re doomed. I guarantee the terms of your transaction will change – and not in your favor. 

As a seller, your exposure can last years due to safeguards buyers include in the purchase agreement, such as reps and warranties. If the buyer discovers a material misstatement – even after the closing – they may seek damages pursuant to the reps and warranties you signed in the purchase agreement. Even worse, they may offset any payments due to you via a setoff.

Full transparency can reduce the buyer’s perception of risk, meaning they may be willing to pay more for your business. Honesty reduces a buyer’s perception of risk and as a result, increases the value of your business. 

The best way to maintain a position of strength during negotiations is to have options with multiple buyers interested in your business. 

Conclusion

Many factors that affect the value of your business can be boiled down to two simple elements – risk and return. The less risky your business, the greater its value. Likewise, the more potential your business is perceived to have, the higher the possible value. For most businesses, focusing on reducing risk is more prudent than focusing on maximizing potential. This is because potential is usually limited by external factors, such as demographic information and industry structure, whereas reducing risk is less influenced by these external factors. Value also tends to be more adversely affected by risk than it is positively impacted by the potential for returns. So, generally speaking, you will benefit more from reducing risks than you will from creating the opportunity for returns.

The range and mix of potential elements that can affect the value of your business are complex. Reality is more nuanced than a simple list of a dozen or so factors. When evaluating your business, buyers will initially consider a vast collection of factors and then reduce this list down to just a few that represent the greatest amount of risk. When selling your business, it’s wise to pay a professional to independently evaluate your company to identify the factors that have the largest impact on the value of your business and then develop a strategy to mitigate the negative ones.

Here’s a cheat-sheet listing the factors that can affect the value of your business:

The Industry

• Barriers to entry
• Acquisition activity in your industry
• Industry trends
• Industry desirability
• Industry growth
• Scalability
• Industry stability
• Ability to replicate
• Regulations

Competition

• Degree of consolidation or fragmentation
• Degree of organic growth that’s possible
• Strength of competition
• Strength of your competitive advantage
• Threat of new entrants
• Threat of indirect competition and the effect of technology
• Brand awareness of your business vs. competition
• Reputation of your business vs. competition

Products and Services

• Ability to increase pricing
• Degree of product concentration
• New products in development
• Degree of specialization vs. commodity
• Future outlook for your product category
• Overall demand for your product – discretionary, cyclical, and countercyclical
• Intellectual property rights
• Warranty obligations

Customers

• Mix and type of customer base, like Fortune 500 or mom-and-pop stores
• Customer acquisition metrics
• Product fit with acquirer’s product line
• Customer database (CRM)
• Customer concentration
• Existence of close relationships with customers
• Degree of repeat or recurring customers
• Customer contracts

Operations

• Systems
• Attractiveness of location and facilities
• Ability to expand facilities and capacity utilization
• Ability to relocate business
• Age and condition of equipment and other hard assets
• Age and condition of inventory and turnover

Staff

• Degree of dependence on owners
• Number of active owners involved in business operations
• Compensation of owners
• Family members involved in business operations
• Strength of management team
• Dependence on key employees
• Compensation of staff compared to industry standards
• Average tenure and turnover rate of staff

Finance

• Overall financial performance vs. industry averages
• Revenue trends
• Growth prospects
• Gross margin trends
• Profitability trends
• Recurring revenue
• Cash flow cycle
• Working capital requirements
• Capital expenditures
• Quality of financial records

Legal

• Adequacy of insurance coverage
• Strength of intellectual property
• Pending litigation

Economic Factors

• Strength of national, regional, and local economy
• Inflation rates
• Unemployment rates
• Labor trends

Other Factors

• Negotiating skills and posture
• Overall marketability of your business, size of buyer pool, and financing available to acquire your business
• Factors that affect timing – price, region, financing, industry, attractiveness, marketing strategy

This list contains most of the factors that can impact the value of your business. However, there may be others depending on your product or service and industry.