For the newbie, looking to purchase an existing business for the first time, their attention is immediately drawn to the purchase price, and for good reason – they are looking to likely make one of the biggest purchases of their life. They are looking to invest in their future and if the price isn’t right, it could have drastic financial consequences.
If the price is even remotely in your ballpark, I believe you should view the price tag as a conversation starter. The question in your mind should be, “how do I respond to this purchase price?”. Before we get to that, let’s take note of three core principles of negotiating the price for the purchase of a business: (1) listen (2) leave emotion at the door (3) be prepared to walk away.
- The art of listening
Listening, in my opinion is the most significant skill one can possess in business, whether it be negotiating a deal or resolving a dispute. I find that listening has been the secret to my own success in sales and dispute resolution.
Listening, not waiting to talk.
Listening, and identifying issues, not waiting to make a point.
Listening and validating concerns.
The art of listening can perhaps be the most powerful tool in disarming an adversary or a counter-party. Here, we look at how listening can help you identify an opportunity to negotiate a better purchase price.
If a price tag is a conversation starter, then your first question (or response to that price) should be “how did you arrive at that price?” Some sellers will be extremely transparent pointing to certain assets, revenue streams, liabilities, debts, financial achievements, and record of success.
Other sellers may be not so transparent, which is always a point of concern in general but not necessarily a deal killer. Remember the goal in asking about the purchase price isn’t to bully or corner the seller into something more reasonable for you. The goal rather is to listen and then identify areas of concern or potential areas for further negotiation or discussion. You want to identify that “nugget of truth” that could help you understand more about why the seller is selling, what they need or want out of this transaction, and how they determined the value of their business. Sometimes you’ll find that the seller’s self-proclaimed “valuation” has some giant holes. Maybe it’s based on some perceived “future profitability” that isn’t quite realistic for that business/industry. The point is, you want to identify any area for possible negotiation and the best tool you have at your disposal is simply listening.
One of the smartest moves you can make once you’ve decided to engage the seller is to ask for or obtain an independent valuation. In any event, having an independent valuation is key to a legitimate business acquisition. With an independent valuation, you can feel comfortable knowing the purchase price is at least in the right ballpark.
You can enter into an exclusive agreement subject to the outcome of a valuation report to ensure that the seller isn’t still shopping the business out to potential buyers while you are getting/reviewing a valuation — that is not uncommon. It probably means you have to make a good faith deposit but that is a reasonable request.
- Leave emotion at the door
Emotion is the killer of all deals. I say this from personal experience as well as in my professional experience counseling people in contracts and litigation matters. That is why we hire people to assist us in these contract matters – so we can remove the emotional elements and focus on what makes sense from a business planning perspective.
- Be prepared to walk away
It sounds so cliché but if the deal is not working for you after reasonable efforts have been exhausted, then throw your cards on the table and be prepared to walk away. You’d be surprised how often this works when dealing with stubborn people who have other advisors and brokers in the mix, especially when a business has been on the market a while!
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