Negotiation 101: How to Negotiate on Price When Selling a Business

Any owner can put a business on the market, but selling successfully is another story. With thousands of dollars hanging in the balance, today’s do-it-yourself sellers need to learn the fine art of negotiation before it’s too late.

As selling businesses independently has become an increasingly viable method for entrepreneurs, many business owners have learned how to prepare their companies for sale and effectively market them to potential buyers. Negotiation, though, is perhaps the one area in which for-sale-by-owner (FSBO) sellers most frequently drop the ball. It’s also one of the most important.

In a typical business sale, the negotiating skills of the buyer and seller can result in dramatic swings in the final selling price – regardless of how diligently the seller has prepared the business for sale. If the seller isn’t up to the task, almost all the work that has gone into the listing can be undone in a single negotiation session.

Unfortunately, this undesirable situation frequently becomes a reality for many sellers in the FSBO marketplace. The good news is that by equipping themselves with a basic understanding of the negotiation process, FSBO sellers can learn how to stand their ground and get every dollar they deserve.

The overarching principle of successful negotiation is to negotiate from a position of strength. That’s sometimes easier said than done, but in today’s business marketplace there are many ways for sellers to favorably and accurately position themselves before the negotiation process even gets underway.

Avoid a Distressed Sale

A stressed business is easy prey. Although sellers don’t always have a choice about the timing of the sale, many times they do. Unless the business is in imminent danger of going belly up or is being forced to be sold by family circumstances such as death or divorce, sellers should plan for the sale far in advance and be prepared to list it when market conditions are ripe.

This often means a concerted effort to reduce expenses and liabilities and to increase market share in the years leading up to the sale. Faced with the evidence of a thriving, top-shelf establishment, buyers will have a difficult time arguing for anything the less than the business’ actual value.

Leverage Valuation

The valuation process is designed to provide a rational basis for the asking price. Sellers who throw together a flimsy, guesswork valuation at the last minute automatically put themselves at a disadvantage during negotiations.

FSBO sellers are better off conducting the valuation through a third-party provider, including reliable online services such as bizbuysell.com (http://www.bizbuysell.com/business-valuation-report/). There are also experienced and reputable valuation professionals available to help. Outside valuation is an added expense, but it more than pays for itself because it gives the seller a stronger leg to stand on when the buyer tries to poke holes in the asking price. It also gives the seller confidence in the asking price and increases his or her resistance to buyer demands.

Create a Bidding War

Almost everyone knows someone who sold a house above the asking price because more than one buyer expressed interest at the same time. It’s possible to create a similar scenario in the sale of a business, but to do it the seller needs to maximize the attention the business receives in the marketplace.

One of the best ways to maximize exposure is to list the sale online. The majority of small business buyers conduct their search themselves, and increasingly, the place they do so is on the internet. By listing online, sellers have the ability to customize their listing in ways that can make it truly attractive and boost visibility to stir up competitive interest among buyers, all of which can give the seller the ultimate upper-hand in negotiations.

Consider Concessions in Advance

Sooner or later, the buyer will want to discuss the subject of seller concessions. Concession requests run the gamut and can include everything from seller financing to on-the-job training. Although concessions may not directly impact the sales price, they often amount to a financial loss, a major inconvenience, or both.

The worst time for a seller to determine whether he or she is agreeable to a concession is during the middle of a negotiation. At this point, the temptation to make concessions simply to close the deal is usually too high. Instead, sellers need to consider the specific concessions that are agreeable before they begin negotiating with buyers, especially in a market where buyers view concessions as standard practice.

If a concession isn’t acceptable to the seller before negotiations begin, then it shouldn’t be acceptable in the middle of the process.

Be Patient

Patience may be a virtue, but when it comes to selling a business it’s also a necessity. The owner of a well-positioned business should have the ability to wait until the right buyer - and the right price - comes along. If the business absolutely must be sold in a short time period (six months or less), then the sale begins to exhibit the qualities of a distressed sale and the seller will be at a significant disadvantage in negotiations.

The patience factor really comes into play during negotiations when it impacts who wants the sale to happen more – the buyer or the seller. Even though the seller may be anxious to seal the deal, the person who appears to want the sale to happen the most is at a disadvantage.

The good news for sellers is that aspiring business owners can rarely contain their enthusiasm. If the buyer is convinced that the seller’s establishment is the right company for his first (or second or third) foray in small business, sellers have a statistical advantage, provided they can demonstrate their intention to stand firm until a buyer emerges who will meet their expectations.

However, there is a limit to seller patience. If the seller experiences a succession of serious buyers but is unable to finalize the deal, it’s probably a sign that the seller’s expectations are too high even though his or her negotiation skills are hitting the mark.

As more business owners seek to sell their businesses on their own, negotiation skills will continue to become more and more critical. The better sellers can prepare in advance and stand firm on the terms they desire, the greater success they’ll have for a smooth and satisfying sale.

About the Author

Mike Handelsman is the General Manager for BizBuySell.com, the Internet's largest business-for-sale marketplace. Since 1995, BizBuySell has offered tools that make it easy for business owners and brokers to sell a business and potential buyers to find the perfect business. BizBuySell lists more than 50,000 businesses - spanning 80 countries - for sale at any time, with over 4,500 added or updated each month. BizBuySell also has one of the largest databases of sale comparables for recently sold businesses and one of the industry's leading franchise directories. It has approximately 800,000 visitors to the site each month.

Prior to his online experience, Mr. Handelsman began his career in brand management with Procter & Gamble, and also worked as a Management Consultant with McKinsey & Company in Chicago and San Francisco. For the past 15 years, he has had extensive experience dealing directly with start-ups and early-stage businesses.

Mr. Handelsman is a graduate of Duke University, and holds a MBA from the Harvard Business School.

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