Successful negotiations require a win/win situation for both buyer and seller. Remember you most likely will need the seller to assist you over the initial transition period. Giving up something in negotiating a deal can be a huge win for a buyer over the long term.
Up to this stage you may have been dealing with a business broker. As we know the Business Broker represents the seller and he/she is engaged to get the seller maximum dollars for the business.
Now is the time to turn the tables around and have the broker work for you. Sounds strange but this is how and why.
Many brokers selling a business have no idea how the business was valued. The asking price is always negotiable because there is no hard or fast rule on valuing a business.
Depending on the business, it may be valued on turnover or revenue or maybe a multiplier on profit or on EBIT (earnings before interest and tax) or maybe the seller has a debt that needs to be paid out and that is the asking price, no formula needed. The point is ignore the asking price.
Business brokers only get paid commission if they sell the business. If a business broker knows that a buyer is keen on a business and ready to make an offer, they will quickly want to have the offer in writing. They may suggest there is some urgency as:
Someone else is interested - lets get in first or their colleague is about to receive an offer this evening
It may be true but most unlikely. Their focus is to get an offer, get it signed by both parties, get a sale and get commission.
Before presenting an offer, the ball is now in the buyer’s court. The buyer is in charge and should always take charge.
At this stage you should have worked out what you believe the business is worth and what you are prepared to pay. You may have had your accountant involved or a buyers advocate to assist you. The price in your offer should allow some room to move, which will be apparent in closing the deal.
Put your offer in writing in the form of a Heads of Agreement or Letter of Offer. Remember this is your offer not the Business Brokers. Ensure you have included various conditions in the offer which may include, subject to finance, landlord approval, due diligence, trial period, restraint of trade and assistance period. Conditions will vary but ultimately form an important part of the offer and negotiations.
If your offer is not subject to finance, therefore any borrowings are independent of the performance of the business, then you are in an excellent position to save thousands on the deal. Why?
Many deals fall over as the buyer cannot obtain finance. In many cases this is because the seller has been unable to provide sufficient financial material or the trading history of the business has been poor and does not provide the security the banks require on lending. There are a multitude of reasons for this outcome, but top of the list is that the seller has been reducing their taxable income and tax liability by not declaring all revenue or overstating expenses.
When a deal falls over due to finance it may have taken weeks for the banks to provide their final determination. The seller and broker have to start again and the cycle begins again. Having cash or not having to borrow on the business is a powerful position to be in when negotiating a deal.
When preparing an offer be prepared to pay a deposit of 10% of the offered amount. The business broker will advise you that it shows commitment and you are a serious buyer but ultimately the deposit will be deposited in the broker’s trust account and when released on settlement will cover their commission.
If the offer is not accepted or the deal falls over as a condition has not been met, then the deposit is refunded in full.
With a letter of offer or Heads of Agreement signed by the buyer and a 10% deposit in hand, something strange happens. It’s like a miracle. The business broker switches from the sellers agent to the buyers agent. They want the deal done. Their commission depends on a deal being done.
There may be some negotiating on the deal but be in control and keep the emotion out of the equation. Remember the broker is now working for you and the seller is under pressure.
For a successful deal for both parties there needs to be a win/win result. Be prepared to give up something and revisit what you had set aside for room to move. At the end of the day you want a good deal and the seller to feel satisfied with the outcome.
It is so important that the seller is comfortable with the end result because a successful hand over of a business relies on the sellers input and assistance. A small win for a seller at the end of negotiations can be a huge win for a buyer in the long term.
If you would like to have a chat about getting the best deal by negotiating to buy a business, please contact BBA