Buying a business is an opportunity to expand your market presence and unlock brand-new opportunities. But even the perfect sales target doesn’t mean you’ll get a reasonable price.
Negotiating hard is crucial for buying any of the UK’s 5.6 million registered businesses because an overvalued business diminishes profitability. In this guide, we discuss the art of negotiating the best sales price on your next business acquisition.
Is it a good idea to negotiate on price when buying a business?
Bargaining hard is an idea that often scares people because they fear offending the other party or coming off as penny-pinching, but negotiations in business sales are expected.
Sadly, most people are poor negotiators, with only 23% of UK sales people agreeing their negotiation skills lead to long-term value. While contract negotiations are tiresome, a great deal can save tens of thousands of pounds when buying a company.
Not negotiating almost always means paying a substantially higher price and giving up on your interests. In other words, grasp the nettle and pay attention to your negotiating strategy.
When should you negotiate price in a business sale?
Always.
It’s that simple. You should always negotiate the price in a business sale because it’s expected. There’s no great mystery surrounding the fact sellers will typically ask for more than a business is worth knowing they’ll be bargained down later.
The only exception to this rule is if you’re purchasing a business for a ridiculously knocked-down price. However, these types of transactions are rare.
What to consider when negotiating price in a business sale
Throwing out a random number in negotiations only leaves you looking unprepared. The key to any successful negotiation is researching and understanding where your position begins, what you want to achieve, and where your red lines are.
Here’s a rundown of the main aspects of negotiating the price:
Financial Performance – Examine the current, past and future financial performance of the business you want to buy. Dig into the profit margins, revenue, income streams and cost structure. Poor financial performance could provide you with leverage.
Assets/Debts – Assess the value of the business’s assets, including intangibles like intellectual property and reputation. Compare this value with liabilities like monetary debts and potential lawsuits.
Market Positioning – Where does this business fit into the overall landscape? Perhaps it’s a community fixture dominating a mid-sized town or an industry leader due to a particular technology.
Industry Outlook – Where is the industry going? If you push the issue in negotiations, buying a struggling business when your industry isn’t thriving can result in significant discounts.
Motivations – Investigate why the seller wants to sell their business in the first place. Struggling businesses offer the most leverage, but a managing director desperate to retire also produces leverage.
The best negotiators understand their target businesses almost as well as their own. Learn as much as possible about the firm you want to buy to go into negotiations with as much justification for a better price as possible.
The best ways to negotiate price when buying a business
Negotiation is an art form. The best negotiators understand that it’s about both logic and emotion. Expect to embark upon multiple rounds of negotiation to arrive at a number both sides agree on.
But what’s the best way to approach each negotiation round?
Show respect
Above all, show respect at every stage of the process. Don’t enter the room with bluster, demanding a lower price, because even a struggling business owner will walk away out of pure spite.
How you present yourself and your attitude is as essential as your justification for getting the best price possible.
Know your leverage
Everyone wants a lower price, but what’s your justification for getting it? You’ll have to convince the seller that what you’re asking for is fair using evidence.
Begin by evaluating where your negotiating power comes from. This could include:
- The industry is experiencing massive difficulties right now.
- The average price of other businesses that have recently sold.
- Poor future financial projections.
- The cost to you to absorb the business into your existing setup.
- The reasons the seller wants to sell, such as a desire for a quick sale.
Naturally, you should prepare your counterattacks for when the seller comes back at you. Knowing your arguments and likely counterarguments puts you in a powerful negotiating position.
Support your arguments
Cold, hard facts must back up your arguments. How might this work in practice?
For example, let’s say you want a lower price because integrating the buyer’s operations into your own would be costly. Drafting an independent consultant who has assessed the costs of integration would be an example of effective support for your argument.
Another example could be if you argue that the industry’s short-term prospects are poor, you could present declining profits and lowered projections from the most prominent players in your niche.
Whichever argument you make, ensure that it stands up to scrutiny.
Open the deal structure
Price represents a single component of business negotiations. Concentrating exclusively on price is rarely the smart option because it dismisses the rest of the transaction’s intricacies.
For example, one buyer may offer a higher price but require more financing, while another may offer a lower price but have the cash to pay upfront. This is a simplistic example but demonstrates how price isn’t everything.
Sellers are likelier to choose the buyer who helps them meet their goals, so think about how your deal can help them accomplish them.
Factor in the seller’s desires
Not every seller is looking to get the largest figure possible. Many sellers have other key concerns about the firm they’re selling, such as:
- Will you carry on the business’s name and its legacy?
- Are you planning to run the business in a way that aligns with their values?
- Will your acquisition plans keep their employees at work?
Granted, some sellers don’t care about anything other than getting the highest price possible, but you make this assumption at your peril.
Enter negotiations considering the seller’s desires and what you can do to meet them.
Hire a professional negotiator
Professional negotiators are an asset to any business sale because they have embarked upon hundreds – if not thousands – of negotiations. Although reading books and blogs can prepare you for negotiations, nothing compares to what a professional brings to the table.
Intermediaries prepare you for what you can expect and help moderate strong emotions from both sides. Plus, objective advice is invaluable when buying a business.
At Hilton Smythe, our business brokers are negotiation specialists who can provide logistical support for you as you embark upon your merger or acquisition. To learn more about how we help, speak to the team now.