Negotiating Business Sales
In the course of selling or buying a business, most parties engage in some level of negotiation over the terms of the deal. Sometimes this negotiation may lead to the deal falling apart and sometimes this may lead to a deal’s amicable resolution. Assuming that both parties want to make a deal, the negotiations should serve to make the deal happen. In order to increase the chances for a deal to be struck, some general rules should be followed by both the seller and the buyer. These include negotiating all significant issues before the purchase contract is signed, writing down important goals prior to negotiation (with bottom lines for each), and stressing why goals are important to each party.
Conclude Negotiations When Purchase Contract Signed
- Negotiations over the terms of a business deal may commence any time after an offer is made by the buyer.
- The offer typically comes in the form of a Letter of Intent or any formal document that spells out the buyer’s full and formal offer.
- At this point the seller will respond to the buyer’s offer.
- Rarely will a seller simply accept a buyer’s offer.
- Hence, negotiations will occur over any and all of the deal points including the purchase price, the financing terms (if any), the non-compete, the training period after the closing, what is included in the sale, and a host of other possibilities.
- No matter the course of negotiations, it is absolutely essential that the negotiations be concluded if and when the purchase agreement is signed.
- The purchase agreement is the final contract that both parties agree upon and is the legal instrument memorializing all terms of the deal (although the closing is contingent on any contingencies expressed in the purchase agreement).
- If either party raises objections to issues that were already agreed upon in the purchase contract, it will inevitably create ill will and mistrust.
- The most common way to destroy a business deal is to try and re-negotiate terms that were already agreed upon.
- When the terms of a deal are formally agreed upon in the form of the purchase agreement, all negotiations must generally stop absent some new information or event.
- Otherwise, the party seeking to renegotiate terms will be seen as acting in bad faith and a deal will generally not occur.
Write Down Important Goals Prior to Negotiating
Prior to the commencement of negotiations, both parties should write down all of their main goals of the transaction. Most parties automatically first focus on the purchase price as their ultimate goal. In reality, however, the overall purchase price is just one of the many deal points which must be thoughtfully considered by both the buyer and the seller. One must think of all phases of the transaction including what material will be requested and available during the formal due diligence phase (which occurs after the acceptance of the purchase agreement and is typically a contingency to close), and how much training the seller can or will provide after the closing. In order to avoid raising such issues after the terms of the deal have been agreed upon, both the buyer and the seller should write down all of their goals and concerns so they may raise such issues at the appropriate time.
Stress the Purpose of Deal Points When Negotiating
Obtaining one’s preferred deal points during negotiations is more easily accomplished by explaining the purpose and reasoning behind the desires from each side. This will better enable the opposing party to see another point of view and hopefully compromise in finding a solution. Often times, either the buyer or the seller in a business deal will fail to realize that the other party during negotiations is not their enemy and trying to take advantage of them. This type of ill will and negative energy may be overcome by simply spelling out the reasons behind a proposed negotiating position.
Example of Negotiation in Business Sales
- Let us suppose that Sally owns Sally’s Auto Shop and is negotiating the sale of her auto shop to Bill.
- Bill has submitted a letter of intent with the assistance of a professional business broker.
- In formulating his offer, Bill wrote down to himself all of his important areas of concern and his ‘bottom line’ deal points.
- Sally thus receives the letter of intent, which contains an offer of $250K with a 30 day free training period after the closing, and a five year/50 mile non-compete agreement (among other terms and contingencies).
- Although satisfied with the proposed price of $250K, Sally is not planning to retire and therefore does not want to sign such a broad non-compete agreement (which prevents her from working in or operating an auto shop for five years within a 50 mile radius of the shop).
- Negotiations ensue, and the parties are at an impasse.
- With the assistance of the business broker, Bill explains to Sally the purpose behind his proposed non-compete.
- Bill is planning to open multiple auto shops with a wide geographic reach, and therefore does not want Sally lurking as a possible competitor to his future locations.
- After much discussion, a compromise is reached: Bill is willing to carve out an exception to the non-compete for auto transmission shops (allowing Sally to work or operate auto transmission shops) but not general auto repair shops.
- Sally agrees to this because she enjoys working in the specialized field of transmissions (rather than general auto repair) and Bill has no desire to offer transmission repair or replacement in his auto shops.
- Both sides effectively communicated the reasoning behind their respective desires, and the deal was saved.
Negotiating a successful business deal requires both sides to understand their own goals ahead of time and to effectively communicate their reasoning behind the goals. So long as both parties want a deal to occur, effective negotiation will usually result in a successful closing.
Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your business.