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How to sell a small business
Negotiating with buyers to get the best price possible

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Ten things you should know when negotiating

Excerpt from The Business Sale System: Insider Secrets To Selling Any Small Business

Negotiate in this order: needs, terms, price. Start out by drafting a list of your needs in selling the business. Do you want a job with the new owner? Does you nephew want to keep working for your company after it’s sold? Do you want to continue attending the annual industry convention on company money for the next five years? Have a low-key discussion to discuss both buyer and seller needs before your start talking price or terms. Then discuss terms – how much cash versus deferred payments, stock versus asset sale and other terms. You can’t be too specific, but both buyer and seller have a pretty good idea of what terms they are seeking. After all of this is on the table, discuss a price figure.

Terms drive the deal. You discuss terms first because terms are more important than price, and terms will have a tremendous impact on price. Don’t assume price is the key, because in 99% of deals, it’s the terms that make or break the deal.

Do your negotiating before the Letter of Intent is issued. The LOI states the terms and price – the two most important things you’ll negotiate. Once those are in the LOI, the rest is details that the attorneys will hammer out and there’s not much left to negotiate on. Don’t accept a Letter of Intent assuming you will be able to negotiate something different later.

Don’t play hardball, bang the table or say things are "non-negotiable." Contrary to movies and TV, business sale negotiations are best carried out when they are low-key. It's OK to set schedules for steps to be completed, but don’t issue ultimatums and unrealistic deadlines for the sake of acting tough. Playing hardball is a good way to scare a good buyer away. Acting like a jerk is not only unnecessary but risks blowing the deal. Think of the negotiations as a chess match, not a football game. Keep emotions out of negotiation.

A seller who says, “I won’t take a penny less than $2 million!” is setting themselves up for a fall. There is always a set of terms that can offset a lower price. There is always a higher price that can offset non-favorable terms. In other words, everything is negotiable. You know it and the buyer knows it.

Let the buyer make the first real price offer. In your selling memorandum, you have listed your asking price. But when the buyer asks, “What do you really want for the company?” answer in general terms or repeat the asking price as listed in the selling memorandum. You want the buyer to make the first real offer. They will probably offer less than you want; if so, reject the first offer by saying, “That’s too low.” Make them come up with a second offer.

Keep “deal momentum” going: Try to keep the process moving forward at all times. Keep everyone enthusiastic by responding promptly to requests for information and to proposals the buyer makes. Dragging out the process causes the buyer to lose interest and move on.

Don’t nitpick. Going back and forth with little details is a sure way to irritate the buyer, run up legal fees, and kill deal momentum. I once worked with a great negotiator, who whenever the discussion dragged into extreme minutia, stood up and declared, “I’m not going to pick sh*t with the chickens!” That usually got everyone back on track.

Don’t negotiate with someone who can’t make a final decision. If you lay your cards on the table to a messenger person who can’t say yes or no, but can only deliver the information to their boss, you are giving up most of your negotiating strength. The buyer can see your package in its entirety and chip away at it instead of negotiating point-by-point. You may have to meet with a second banana early in the process, and if you do, keep some cards hidden until later.

Know your “walk away” price and terms. Keep it to yourself, but know the point at which you’ll say, “Thanks but no thanks,” to the buyer and move onto the next prospect. Don’t waste too much time with a buyer who isn’t going to meet your needs, terms and price.

Keep some say in drafting the purchase agreement. It’s customary for the buyer’s attorney to draft the purchase agreement, and that saves the seller some money in legal fees. But you may lose that and more by having to negotiate out a bunch of subtle land mines the buyer’s attorney put in. Either suggest that your attorney will draft the representations and warranties section, or let them do the first draft but be prepared to replace what the buyer provides for reps and warranties with your own attorney’s work.

About the author: James Laabs is an experienced business seller and author of the book The Business Sale System: Insider Secrets To Selling Any Small Business (First American Publishing) Click here to find out how to buy the book.

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Keys to surviving due diligence

Excerpt from The Business Sale System: Insider Secrets To Selling Any Small Business

You’ve accepted a Letter of Intent (LOI) from the buyer. Now the buyer has a certain period of time (the length should be stated in the LOI and shouldn’t exceed 4-6 weeks at the most) to examine every aspect of your company in fine detail. Basically, a Letter of Intent states that, if all information in due diligence confirms what the buyer has been told, that the buyer intends to carry out the purchase at the price and terms stipulated in the LOI. Letters of intent are generally not legally binding, but a quality buyer will honor the terms of their LOI.

In other Business Sale Center articles you have read about the importance of being honest in your selling memorandum, financials and other information that you give the buyer. Now you’ll receive the payoff for that honesty when the due diligence goes without a hitch and leads to a closing.

Here are the major areas a buyer will focus on in due diligence:

Litigation: Recent and pending litigation, especially in the area of product liability.

Financials: The buyer will look to support the financial information they’ve already received. They may spot-check inventory, look for items where maintenance or repairs has been deferred to artificially lower expenses and boost profits, examine accounts receivables for age and overall quality, and carefully look at accounting methods used.

Returns and allowances: The buyer will want to know if there are any pending returns of merchandise and if any customers have agreements allowing future returns.

You: Some buyers may hire an investigator to check you out. At the very least, most buyers run a credit check on current owners.

Tax contingencies: Is the business being audited? Is it up to date on taxes of all kinds (withholding, unemployment compensation, etc.)? How aggressive were recent returns in tax avoidance?

Unrecorded liabilities: This is a big worry for a buyer. Accrued vacation pay, returns and allowances, warranty obligations, unfunded pension liabilities, and unfunded healthcare liabilities for retirees are the key areas of concern.

Business relationships: What is the relationship like with key suppliers and customers? Do you pay suppliers on time? Do they sell to your competitors? Are key customers happy or are sales declining? Some buyers will ask to speak with key customers before the closing. This is generally a bad idea and should be avoided if at all possible. Try to satisfy the buyer’s need for information in other ways.

Licenses and permits: Any problems with authorities that would keep these from being renewed?

Intellectual property: Patents, trademarks and copyrights will be examined.

Employees and management: How likely is it that key management and employees will stay after the sale? Are there employee problems of any kind looming?

Sales and marketing: The buyer will look carefully at spending for the last year or two to make sure you haven’t been skimping on advertising or promotion to artificially boost profits. Customer lists and sales figures by product and customer will be carefully analyzed.

New products: If you said new products were in development, the buyer will want to see them, and determine how realistic your earlier statements about the products were.

Related parties and perks: You should have adjusted these out in your recast financials, but the buyer will examine them to make sure you were realistic in your recasting procedures and assumptions. Make sure the buyer is on the same page with you regarding salaries to children and spouses, travel perks and similar expenses you expect the buyer to bear after the sale.

Relocation and change of ownership costs: If the buyer needs to relocate the operation, change phone numbers, etc. these all have costs associated with them that the buyer will now analyze in detail. It is fairly common for the buyer to try to negotiate the price slightly lower after the LOI because they realized that these costs were much higher than they anticipated.

The Business Sale System: Insider Secrets To Selling Any Small Business (First American Publishing)

Click here to find out how to buy the book.