Effective negotiation not only helps you get deals done, it helps you successfully purchase a business. It involves developing a tactical strategy with goals, requirements and limitations. It also involves a thorough understanding of the business for sale, its industry and the current market.
It all starts with making an offer, and then the seller comes back with a counter offer. The dance continues and it’s time to negotiate further. Yet, which negotiation tactics will help you get the very best deal? At the end of the day, your negotiations will come down to a compromise that benefits both parties.
6 negotiation tactics to help you get the best deal:
1. Know Your Requirements and Limitations as a Buyer.
Ideally, when you submit an offer to buy a business, you should follow some general guidelines on what to include in your offer letter. Before you enter negotiations, you need to know the most you can afford to pay including your down payment and financing needs. You should have a clear picture of the minimum cash flow needed to sustain both your lifestyle and your business.
If you don’t know your requirements and limitations, you could pay more for a business than you can afford. Knowing these on all fronts ahead of time will allow you the ability to walk away, should the seller become unwilling to compromise when you don’t have flexibility. Buying a business is not rewarding if it breaks you financially and you are unable to make a profit.
When you present your initial offer, you should neither offer an unrealistically low price, nor start out by presenting your best offer. With the former, the seller may not see you as a serious buyer. With the latter, you’ll have no wiggle room to negotiate price or other terms.
2. Know the Seller’s Requirements and Limitations.
Typically, the seller will want to negotiate on the down payment as well as the owner financing period. Of course, the seller will want as much cash up front as possible and potentially shorten the time period for financing. Offering the seller a bigger down payment will give you more leverage during negotiations.
Both of these concessions may be possible if you can either come up with additional cash for your down payment or bank financing to supplement owner financing. Buyer beware: you cannot concede what you cannot afford. If your debt service is too high with either bank financing or seller financing or both, then you’ll risk defaulting on one or more of your loan obligations.
At the end of the day, the seller has both financial and lifestyle goals. Find out their biggest desire and pitch terms that speak to those desires. They may be eager to exit their business, or they may be willing to wait for the perfect buyer. You may be able to find additional negotiating points if you cannot concede on others.
For example, in addition to expecting a financial windfall from sale proceeds, the owner may feel a responsibility to their employees after selling the business. You may not be able to concede on the down payment amount or financing terms, but perhaps you can include implementing an employee stock ownership plan in your deal.
3. Know the Current Market Trends.
Studying trends in the market can offer insight into how certain industries are performing in specific geographic areas. The value of a certain type of business can often rise or fall depending on its desirability. Plus, a surplus of opportunities in the business-for-sale market could give you an advantage and serve as a strong negotiation tactic.
BizBuySell’s quarterly Insight Report shows nationwide trends in the business-for-sale market, including median asking prices and sale prices of sold businesses. The report shows transaction data for each industry category, as well as geographic area, and number of days on market. This report can be helpful to both buyers and sellers by showing trends over time of within each local market and industry.
Sellers can often be unrealistically optimistic about their business’ future prospects. You should know the industry and the market the business is serving enough to formulate realistic income projections. If there are downward trends in sales, either industry-wide or for the business itself, leverage that information to get a better price.
Remember, deficiencies in a business don’t mean you should walk away, it just means you have more of a basis to negotiate.
4. Know the Business Itself.
Remember, you are negotiating based on what you currently know about the business, including its financial performance, operations and future potential, and everything will be subject to verification before closing during final due diligence. Look for opportunities, such as any problems that need to be fixed, that you can use as leverage during negotiations.
Meet personally with the seller and get to know their story, why they are selling and how much they think you can make owning the business. This is your opportunity to make a good first impression; they’ve spent years building and managing this business and want to feel comfortable handing it over to the right buyer. It’s also an opportunity to learn of any problems that need to be fixed that you can use as leverage during negotiations.
5. Protect Yourself.
Your offer to purchase the business should include as many contingency clauses as necessary to protect you from any problems you may encounter further down the line. Otherwise, even after all of your due diligence, a prior owner could pass down problems to you either intentionally or unintentionally.
You can also protect yourself by having your good faith deposit held in escrow by the broker or an attorney. This is in case the state of the business (financially or otherwise) turns out to be substantially different based on your due diligence findings.
In addition, you should always ask the owner to finance at least part of the business, even if you don’t require it. Making an owner keep some “skin in the game” means it’s in their best interest to pass on a business to you that’s in tip-top condition. They’re also making an investment in your continued success as the new business owner.
6. Negotiate All Deal Points.
Again, if you can’t concede on every term, find other terms that can be negotiated. The business owner likely has a “sweet” spot they don’t even know about that could tip the scales in your favor. It may take some creativity to find a deal structure that works for the seller and offers you some advantages as well.
Negotiating the purchase of a business isn’t the easiest thing to do, but like all things, it can get much easier with experience. Hopefully, you’re ready to launch out and pursue a business so you can even test and refine your “negotiating mettle.”
If you’d like more information on purchasing an existing business, you can download for free the BizBuySell Guide to Buying a Small Business. You can also find over 50,000 existing businesses listed for sale at BizBuySell.com, the internet's largest marketplace for buying and selling a small business.
Next Step: Get the Guide to Buying a Small Business
This free, 100-page digital book provides step-by-step instructions for buyers.