Forget the trials and tribulations of starting and growing a business. Many entrepreneurs learn that the true challenge comes when they move to negotiate the sale of their company.
There are a plethora of reasons, but the most daunting involve considerations such as valuation (what the business is worth), the competitive marketplace (the number of competing companies that are currently up for sale) and the emotional element. That last factor is one I touched on in my last blog—which covered the questions to ask before selling your business–but it’s one that’s often underestimated. Let me reiterate that, for the vast majority of entrepreneurs, their company is their baby. It’s basically a family member they can’t fathom giving up. It’s where they spend most of their time, it’s what supports their families and, in some cases, is their source of great wealth. In other, less fortunate circumstances, it can be the cause of their financial demise.
But for those who manage to build a sellable business—typically one that has key elements such as a significant number of employees, impressive operating revenue, a strong balance sheet, and/or extensive physical or intellectual capital—they’ll eventually face the choice of passing the company on to a successor, winding it down, or selling. In the latter scenario, entrepreneurs often find themselves in an emotionally-charged, drawn out courting process with a potential buyer (one that sometimes stretches to a year or more). During that period comes the really hard part: negotiating terms and a sale price.
This is often the step that trips up even the most reasonable CEOs, let alone those who believe their company is worth far more than what the market will bear (a common misconception). With that in mind, here’s the right way to negotiate the sale your business:
Follow a process—First, always enlist a team of experienced professionals to manage what can be an extremely complex process. That usually includes accountants and lawyers, but could also mean securing the help of a merger and acquisition, or a valuation specialist.
Then, be prepared to negotiate in this order: your needs, preferred sales terms and target price. It’s only by understanding your needs and goals—which could include considerations such as your desired retirement lifestyle, ongoing financial needs, or even the capital required to fund a new business—that you can determine a reasonable target selling price. Then ask yourself: would a sale even generate enough income to help me achieve those long-term objectives, thereby justifying my engagement in the negotiation process in the first place? If the answer is yes, consider the terms you’d be willing to accept. Would you be prepared to continue working in the business in some capacity for a fixed period as part of the sale? In what way will your personal financial circumstances dictate the structure of the sale, specifically from a tax-planning perspective? These are just some of the key questions that need considering. It’s only when you have answers that you should consider setting a target price.
Don’t play hardball—Again, the business is only worth what someone is willing to pay for it. Analyze everything from industry trends to the macro- and micro-economic conditions to determine whether the time is right to sell. If it is, making unrealistic demands could jeopardize negotiations, and possibly sacrifice the only opportunity to sell the business for your desired price. This is the point where the objective advice of those trusted advisors comes into play and can help make a deal happen.
Negotiate with someone who can make the final decision—Whether it’s an advisor such as a lawyer, or a C-suite executive from the purchasing company, your main point of contact during the negotiations should be authorized to approve a sale. Speaking through a middle man can hamper what can already be an arduous, time-consuming process.
Let the buyer make the first real offer—Sellers who make the first offer set an immediate price ceiling. Put simply, no intelligent buyer will ever ask to pay more than the initial figure that’s put on the table. The price can only decrease. Asking the buyer to make the first real offer not only helps to determine their seriousness about making a deal, but also allows you the flexibility and leverage to push for a higher sale price.
Know your client’s walk-away price—Many negotiations start with both sides far apart, and that’s perfectly acceptable. But as with any negotiation, having a sense of the price your buyer might be willing to pay heading into negotiations will help highlight their walk-away price. Your advisors can help determine what that price might be. Often, a prospective buyer is forced to state their walk-away price once they’ve become exasperated with the process and are close to leaving the bargaining table altogether. Don’t let negotiations reach that point. Keep your demands reasonable and ensure that any price being floated is at least close to both parties’ target figure.
Negotiate a purchase agreement—It’s only once those fundamental considerations are agreed upon, that you should begin to negotiate a purchase agreement. This document will include a final sale price, all relevant terms and other legalities such as potential non-compete or non-solicitation clauses, ownership rights, and more.
At this point, the negotiation heavy lifting is done. Let your chartered professional accountant and lawyer handle the rest.
Hartley Cohen, Partner