7b) The Negotiation: Reaching an Agreement
As stated above, negotiating a deal when buying a business, you should ask the seller to put any other interested parties on hold and that they give you their full attention in trying to make an agreement. When asking the seller to do this, you should express your interest, determination and enthusiasm for coming to an agreement otherwise they may overlook your request. Again, this is where the seller has an advantage as they can negotiate with several parties and know which one they may benefit from most.
Reaching an agreement does not only involve settling a price. Other issues will include agreeing the terms of buying the business such as payment periods, transfer of contracts, obtaining finance, etc.
The negotiation will usually be opened by the seller laying down their asking price. This may have changed from the initial value as they have considered issues that you brought to their attention during your research period. Do not accept this first offer even if it is lower than the minimum figure you had in mind: you may be able to reduce the price further. Assuming that it was higher, your response should be offering the minimum figure that you have reached through your own valuations. The seller may be shocked by your offer but this has now set up the boundaries for negotiation.
With the price you have offered, you should be able to provide supporting reasons and back-up proof to illustrate how you have derived this figure. Such information will be presented to the seller by your accountant and backed by your business broker (if used) who will also be present for the whole negotiation period (and any other assistance you have consulted). If the seller immediately accepts your first offer, then it is a sign that your valuation was perhaps too high and therefore you should try to make another offer: you may want a ready made response for such a situation like “sorry, I forgot about…” However, at this point, the seller will have gained too much information about your position and consequently may have more power over the negotiation.
Now that you have offered your price and the seller has quoted their asking price, an agreement needs to be made that will not necessarily result in a middle value between the two. It is now down to you, with the help of your assistance, to put forward questions and issues that can pull the agreement towards your initial offer. You may ask questions like “what if there is a recession in the industry in the next 12 months?” or “will a change of ownership effect the business?” and so on. The idea is to lower the confidence of the seller that they are asking for a reasonable price.
This will work both ways and the seller may too ask questions which could support reasoning for why your offer is too small and consequently pull the agreement towards their asking price. The seller may also provide a response to your questions that will result in a good, valid explanation and will further pull the outcome of the agreement price in their favour. Do not fall into the trap of telling the seller what you can afford to pay. This question should only be responded to when the seller is trying to help you by determining possible pay back periods and instalment fees.
7c) Closing the Deal
After an agreement on the price and terms of sale has been concluded, the deal is still not closed and therefore has the potential to collapse. For a deal to be completed or ‘closed’, there are certain conditions that have to be met by a specific time and by failing to do so, the deal will be invalid. These conditions are called the ‘Conditions of sale’ and include issues such as:
The verification of financial statements
The transfer of leases
The transfer of contracts/licenses
You obtaining sufficient finance
The transfer of finance
Whoever you use in a professional capacity to legally transfer the business to you (usually a solicitor), ensure they have experience of business transfers as this is undoubtedly the most crucial stage of buying your business. Once the money has been transferred, rectifying even the smallest of issues becomes a major task in apportioning responsibility, and of course cost.
One area of learning is advisable for all those buying and running a business: basic accounts preparation. Almost every activity in business has an effect on cash flow and profitability. It is impossible to see the 'big picture' without a basic understanding of management accounts. There are many books in the mould of 'Accounting for Non-Financial Managers', and 'How to Read Basic Accounts'. This will never be time wasted!
This article may sound a bit like ‘get them, before they get you’, but it’s not about taking advantage, its about steeling yourself in a strange environment and exhibiting some degree of confidence: when there may be very little in reality.
Finally, it is true that ‘speed is of the essence’ on the part of the seller, and that ‘due diligence’ is the watchword for the buyer, however, the true pace of negotiation is that which allows the buyer to get a fair chance to assess the quality and risk of this sizeable task.
Good luck to you all
