The Importance of Price When Selling a Business
Selling a business is not just about the price. This may seem an unusual heading to an article but it now keeps happening too many times and I feel compelled to write about it. Whether you are selling a business or buying a business it is not just about negotiating the price.
There is no question that selling a business is difficult as there are so many items to consider. Equally, buying a business is extremely difficult not the least because the buyer may not know the seller but more importantly to the buyer, because they are yet to fully understand how the business works and what has made it successful.
When you put these basic unknowns together and add the imprecise art of valuing a business, both the seller and the buyer understand there will be a negotiation on the final purchase price of the business. What is intriguing from my perspective is that sellers and buyers can spend a lot of time and negotiating energy to purely focus on the purchase price, which is important as the seller does not want to take less than they think the business is worth and the buyer does not want to pay any more.
However, there are two things missing in this equation. First, the terms of the deal are probably more important than the final purchase price. Just as the final purchase price is emotional for both the seller and the buyer so too are the terms and conditions.
These emotions can go both ways. For example, the seller may be willing to work for free for 4 weeks after the buyer owns the business and not get paid. That is, the seller does not mind giving their time and emotionally does not feel they are giving up too much. If you put a dollar value on it, it could be worth $2,000 to $20,000 depending on the equivalent salary the buyer would pay. Additionally, having the seller work for four weeks and train the buyer instead of one or two weeks could be tremendous value as the buyer gets to absorb more knowledge from the owner.
There are many other examples such as the seller carrying a note as part of the purchase price for a lower rate of interest than a third party lender, the seller being willing to come back and work for three weeks in 6 months time so the buyer can take time off with their family, the seller stepping in to help the business if a key employee becomes sick.
The trend I am currently seeing is for the seller and the buyer to over-negotiate every detail in the transaction. The buyer feels they are doing the seller a favor by buying their company and as a result, should get every demand they make quickly and easily. Conversely, the seller thinks the business is worth more than the buyer is offering and now that the recession is healing, the buyer is going to do so much better and therefore the seller wants to be paid for some of the success they think the buyer is going to enjoy. The position of the buyer and the seller is not unreasonable however, if it gets to the point where it kills the deal, which is what I am seeing happen, then it makes no sense.
Another factor that affects the above is that the seller and buyer need to come to terms on the purchase price and terms of the deal. Separate to this negotiation however, the buyer has to deal with negotiating with the landlord, the lender and if it involves a franchise, the franchisor. The buyer may even have to negotiate with family and friends to borrow money to finance the initial purchase of the deal.
The bottom line in all this is that it is critical to understand what the word negotiation means. According to one dictionary, it says “a discussion set up or intended to produce a settlement or agreement.” The key words are ‘settlement or agreement’ that is, both sides have to give and take or there will be no settlement or agreement. To be clear, once one party demands too much the other party will quickly move to the same position and then neither party will get what they want. Probably the most important component a buyer wants when they buy an existing business is goodwill. In most business sales, goodwill has the highest value. For the buyer to maximize the goodwill they expect to receive from the seller, there is a need for both parties to negotiate in good faith and respectfully. This also applies when the buyer has to negotiate with the other parties in the transaction, especially the landlord.
A landlord is completely separate from the business. If the seller of the business has paid their rent on time and been a good tenant, the landlord does not want to see them go. In most cases, there is nothing in it if the landlord approves or refuses to approve the buyer to take over the lease, that is, the landlord really does not care if the seller and buyer have agreed on the price and terms of the sale as it’s the landlords job to look after the landlords interests. If they do not like the buyer they will not hesitate to deny the buyer a lease.
Negotiations can be tough. It’s fine to make negotiations tough. If it gets to the point where the negotiations are no longer “a discussion set up or intended to produce a settlement or agreement” then neither the seller or buyer will end up with what they want. Animal instincts such as the need to win, be right or pay a fair price can derail a successful business transaction. Understand your personality and the strengths and weaknesses you bring to a negotiation and just as importantly, understand what is important to the other party. The chances of success have just then improved.
If you are thinking about selling your business and would like to know its value, please email me at Andrew@RogersonBusinessServices.com and I can put together a Brokers Opinion of Value for you.
If you would like to see a sample document, click the following link: http://www.rogersonbusinessservices.com/services/selling-a-business