Negotiating Terms When Buying a Business
The price will be the crux of negotiations, but buying a business also means negotiating financing terms, buyer and seller contingencies, time frames, buyer training, employee considerations, and more.
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. The key is finding the right balance of terms that allow the business seller to exit as planned, while ensuring the success of the business under your new ownership.
Here are the basics to consider as you think about negotiating the purchase of a business.
1. Set Your Own Limits on Price and Financing Terms
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 should have clear limits on the price you’re willing to pay, how much cash you can put down, and what financing terms you require. You should have a clear picture of the minimum cash flow needed to sustain both your lifestyle and your new business.
Setting hard limits ahead of time will allow you to walk away, should the seller become unwilling to compromise on areas where 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.
(See How to Make an Offer When Purchasing a Business for more on what to include in your initial offer letter).
2. Consider the Business Owners’ Limits and Cash Needs
Negotiations will always center on price, but the seller will want to negotiate on the down payment as well as the owner financing period – if any. Of course, the seller will want as much cash up front as possible, and a shorter financing period. Offering the seller a bigger down payment will give you more leverage on price 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 in addition to – or in lieu of – seller 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. In addition to financial terms, consider their personal motivations, and pitch terms that speak to those needs. They may be eager to exit their business and accept a lower price to retire early, 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. Understand 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.
(If you’re not already a BizBuySell member, join now. Step one of buying, selling, or exit planning is knowing your market. Set up alerts, and start following the prices of businesses in your area an 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. Consider the Business and Take Interest in the Owner
This may sound obvious, but 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 issues that need to be remedied that you can use as leverage during negotiations.
5. Take Steps to Protect Yourself From The Unknown
Your offer to purchase the business should include as many contingency clauses as necessary to protect you from any problems you may encounter down the line. You don’t want to get bit by issues that slipped past your due diligence.
Having your good faith deposit held in escrow by the broker or an attorney offers protection in cases where the state of the business (financially or otherwise) turns out to be materially 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 – However Small
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.
If you’d like more information on purchasing an existing business, download BizBuySell’s Guide to Buying a Small Business. And if you’re still looking for the right business, you’re in the right place.