How important are negotiating skills during the sale process?
High-level negotiating skills are not as crucial as you might think. And that’s good news for those of us not named Henry Kissinger, the former U.S. Secretary of State who’s widely considered one of the greatest negotiators in history.
You’re not entirely off the hook, however. What you may lack in negotiating prowess needs to be made up for in preparation and positioning.
That means anticipating and resolving any adverse issues before the buyer beats you to the punch. It means avoiding any appearance of desperation. It means entertaining multiple potential buyers. It means maintaining emotional objectivity.
The article that follows addresses all that and more:
- What you can do before negotiations begin to improve your negotiating posture
- When most transactions die and how you can prevent your deal from dying
- Why negotiating skills over overrated
- The key to negotiating (hint: it has nothing to do with negotiating)
- How to maintain your cool during negotiations
- Why you should focus on running your business instead of negotiating
- The number one tactic sophisticated buyers use to drive the price down and how you can combat it
- What you can do to motivate the buyer to speed up the due diligence process
Since preparation is key, let’s start preparing…
Table of Contents
- Conduct Pre-Sale Due Diligence to Maintain Negotiating Posture
- The Importance of Negotiating Position
- Maintain Emotional Objectivity
- Focus on Running Your Business
- Keep Your Business on the Market
- Avoid Deal Fatigue
- The Importance of Honesty & Humility
- The Importance of Communication Skills
Conduct Pre-Sale Due Diligence to Maintain Negotiating Posture
Ideally, you will want to anticipate and resolve any issues before a buyer discovers them. Put yourself in the buyer’s shoes and assess your business as early in the sale process as possible by performing due diligence on your business.
While this is optimally done just before putting your business on the market, it’s never too late to do this. You can even conduct pre-sale due diligence if your business is already on the market. If you haven’t already done so, make this a priority. Have your financials reviewed and in order, and perform legal and operational due diligence on your business as well.
Many business sales fall apart during the due diligence process when issues are discovered. If the buyer discovers problems that weren’t disclosed, the buyer can end up in a unique leverage position, and you will lose your negotiating posture.
As a result, that can entice the buyer to make demands and negotiate a lower purchase price. Make no mistake about it. 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.
Your goal is to not only sell your business and move onto the next phase of your life, but to get top dollar for your business. By conducting pre-sale due diligence, you help ensure you maintain your negotiating posture throughout the sales process.
The Importance of Negotiating Position
Negotiating skills are overrated. The actual negotiating process requires far less expertise if you have the correct positioning. On the other hand, positioning is underrated or forgotten altogether.
The key to negotiating is positioning. When in the market for a new car, is it easier to negotiate the purchase when you desperately need a vehicle or when you couldn’t care less if you walk off the lot with a car?
The key to positioning is wanting to sell but not having to sell. Avoid desperation at all costs.
The more options you have, the stronger your position will be.
- The more buyers that are interested in your business, the stronger your position will be.
- Negotiate with as many potential buyers as possible.
- The better your business is performing, the less inclined you will be to sell.
- Don’t be emotionally attached to the idea of selling your business.
By creating as many options as possible, you will position yourself in the ideal negotiating position.
Once you have created these options, you must subtly communicate to the buyer that you are negotiating from a strong position. Deal with buyers in an interested, professional, but somewhat dispassionate tone. Communicate to the buyer that you are prepared and motivated but not dependent on the outcome of the sale. Convey that you love what you do, yet it is best for you to move on now. In essence, you should send the message to the buyer that you are motivated to sell but not desperate.
Maintain Emotional Objectivity
Stay calm and collected throughout the process. Buyers will become nervous if you lose your cool. If an exchange becomes heated (and it will), wind down the discussion and ask to continue at a later date. Otherwise, do your best to remain emotionally objective throughout the process.
Here are some tips for maintaining emotional objectivity:
- Use a third party, such as an intermediary or broker, as a buffer between you and the buyer.
- Don’t be dependent on the outcome. Do not spend the money before you receive it or make elaborate plans until you complete the closing. Be aware that 50% of accepted offers do not close. Assume the deal will not go through.
- Keep your interest and focus on the business — maintain or increase your revenues. Doing so will increase the value of your business and put you in a strong negotiating position.
Many negotiators recommend ploys or other tricks when negotiating. While these may work, there are risks. The best situation is always an actual position, as opposed to a manufactured or fabricated one.
Focus on Running Your Business
The number one mistake sellers make when they accept an offer is to get too excited and lose their focus on the business. They may not realize that over half of the transactions to sell a business don’t make it to the closing table, even after an offer is accepted. If you want to close the deal, focus on running your business throughout the due diligence process until the closing.
If revenues slip during the process, expect the buyer to negotiate a lower price. If, on the other hand, revenues increase during the process, you can expect to lock in your negotiating position.
Keep Your Business on the Market
Keep your business on the market until you sign the documents at the closing table and the money clears. Note that this is not possible in mid-market deals where nearly all sophisticated buyers (companies, private equity groups, etc.) require exclusivity once you accept a letter of intent (LOI). In these cases, negotiate the shortest possible exclusivity period.
For smaller businesses, keep your business on the market until the day after the closing. Doing so helps you maintain your negotiating position. Additionally, continue negotiating with other buyers throughout the process, so you always have a backup plan in place.
Avoid Deal Fatigue
Avoid deal fatigue by developing options and maintaining your emotional objectivity. 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 last minute. The most common way to avoid this, again, is through positioning. Always have other options available in case the buyer attempts to renegotiate the price.
The best option for avoiding deal fatigue is preparation — by preparing your business for sale, you minimize the chance the buyer will discover a material fact they can use against you during the due diligence process.
The Importance of Honesty and Humility
Any buyer who senses you are dishonest 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. Honesty can pay off handsomely when selling your business. If the buyer believes you to be honest, they will perceive your business to be less risky, and negotiations will likely be smoother as a result.
Humility also goes a long way in a transaction. Price is inversely related to risk. The lower the risk, the higher the price. Whom do you trust more: a pompous, arrogant person or a humble individual? The more humility you show throughout the process, the less likely the buyer will perform extremely thorough due diligence.
The best way to demonstrate humility is when you are communicating the prospects of your business to the buyer. Always strive to be humble and conservative when sharing any subjective information.
The Importance of Communication Skills
Many roadblocks in negotiations can be avoided by implementing basic communication skills such as listening and clearly making your points.
We recommend reading “Getting to Yes: Negotiating Agreement Without Giving In” by Roger Fisher and Willing Ury.
Here are tips for maintaining clear communications:
- Listen to the buyer’s point in full before responding. Let them fully voice their concerns before you answer them.
- If the buyer attempts to dig in on a point, find out what their true concern is.