How to negotiate the sale of your business

Most business owners, after years of negotiating deals with clients and suppliers, are well versed in the art of negotiation. However, when it comes to selling their own business, many can feel overwhelmed by the high stakes and uncharted territory of these complex legal minefields.

But after you've prepared your business for sale, put it on the market and found a reliable buyer, it's time for the hard part.

While buyers strive to acquire companies at the lowest possible price, business owners strive to maximize it. Despite the conflict between these two goals, buyers and sellers have one common goal: closing the deal. To that end, we've put together some key tips to help you negotiate the sale of your business.

Decide your place in the future company

First of all, you need to decide whether you will remain with the company after the sale. This is necessary in order to subsequently discuss your place there.

Some buyers may want you to leave entirely, while others may want you to sell only part of their business. This is useful for the buyer for two main reasons:

1. Reduces the amount they will have to pay.
2. Encourages you to continue helping the business.

If you decide to stay, there should always be a clear understanding of who controls what. Agree with the buyer on who will make strategic, financial and acquisition decisions. After the sale, the new owner may displace you before you are ready. You must have a full understanding of your position and be comfortable with the idea of working for someone else.

If an income deal has been struck, then to some extent you are still working for yourself. It is not uncommon for up to 45% of the total remuneration to be paid as compensation, so you must be sure that this is the best way to spend your time for the expected profit.

Remember that “income” — This is a conditional payment that involves carrying forward part of the purchase price to a future date. The payout amount is based on future earnings or another measure of success. As an owner, you are essentially putting aside part of the price and must understand that you may never get it!

Equip yourself with realistic expectations about how the business will develop over the next 2-5 years. Ideally, you should have thought about this before you put your business up for sale. You want to keep the gap between your expectations for the company's future performance and the buyer's expectations as small as possible. The smaller the gap, the easier it will be to negotiate compensation and the easier it will be to ultimately receive more or all of the compensation. It is advisable to minimize the number of variables associated with the payment of income — ideally no more than one or two. Too many of them can make it very difficult to generate income. Early in the negotiations, agree on how progress towards the payment goals will be measured and who will evaluate it. Be wary of using net profit as a payout target if the buyer controls all cost accounting!

Learning and understanding the buyer's point of view

The seller should always enter into negotiations with a good understanding of the buyer's perspective. What are their true interests? What motivates them? Understanding the purchase motives will increase your advantages in negotiations and allow you to conduct them more individually and beneficially for you.

Study more than just the salesperson, study the sale.

Understand the market

Before your first meeting, find out everything you can about the assets and their values, relevant market activity and industry comparable sales.

Price negotiations

Agreement on the sale price — This is perhaps the most difficult part of the deal. It determines how much capital you will receive and how much ownership the buyer will retain. It also to some extent influences how much borrowed funds the company will have after the transaction is completed.

Before starting negotiations, it would be nice to have a certain number in your head. But within these limits, you should always be flexible and willing to compromise. While the sales price you seek is important, other conditions can also make or break a deal.

When considering the selling price, remember that it is not just one amount. There are a number of different possibilities depending on how the buyer and seller can negotiate.

For example, the sale may involve the costly replacement of all equipment. If the buyer and seller agree, the sale can proceed. If not, then be prepared to negotiate until you can reach terms that suit both.

Other elements to be discussed may include (but are not limited to):

• business assets
• buildings or land owned by a business
• stock stock
• non-competition agreement

Conducting an external valuation of these assets before negotiations begin will ensure you receive a fair and balanced price.

The final price of the business — a key factor in the negotiations, but it doesn’t end there. The terms of the sale are also of utmost importance and should be carefully considered when making decisions throughout the negotiation process.

For example, how will the payment be structured? What will happen to the staff? Will there be a provision for payment of income?

Covenants and warranties

Covenants are defined as “promises of future action or inaction.”

In the event of a sale of a business, this may be a non-compete agreement or an agreement to continue “business as usual.” during the negotiation process (that is, without introducing any sudden, unusual changes in the way things are done).

Guarantees — these are “statements about current and future conditions”.

These are promises that the information provided about the business or its assets is true and correct. The buyer requests assurances in areas such as the accuracy and completeness of the business's financial records or agreement that the inventory of goods and products is accurate.

While warranties and covenants protect the buyer, they leave you, the seller, with an ongoing liability to the buyer after the transaction is completed. To protect yourself, make sure your guarantees are defined as clearly as possible before negotiations begin, in case disagreements arise later.

Transition

Once you have decided on the price, conditions and guarantees, it is time to discuss the transition.

You will need to transfer all assets and contracts, agreements with suppliers and procedures for notifying these people, any hidden liabilities, etc. You will also need to find out what the situation will be with your current employees before the sale. Who will stay and who will go?

During the negotiation process, it is easy to miss important points. After all the time and effort you put into closing a deal, it's impossible to imagine walking away with nothing, but sometimes it's the best option.

It would be in everyone's best interest to simply leave — if your minimum price has not been reached or if the transaction seems uncomfortable for one of the parties. You'll learn lessons that will help you approach sales more effectively in the future.

Be prepared — this is the number one key to success. If you know what to expect, negotiating the sale of your business will be much easier. Additionally, if something unexpected happens, you need to be flexible and know when to take a step back and think things through before starting the whole sales process again.

Business sale — is an important event that can affect the lives of many people. So take the time to think carefully about what is important to you before you start selling. Then you will be able to take these conditions into account in your transaction and conclude an agreement and get the price for your business that will satisfy all interested parties.