By William Bruce
In previous articles, we’ve discussed the steps involved in buying a business including how to analyze a business and making the written offer. Once the initial written offer has been made, the transaction usually enters the negotiation phase.
The negotiation phase is really not complicated. Most likely you’ve already bought a car and/or a home. The negotiations over the price of a business are similar.
The initial offer is usually lower than you actually think you’ll wind up buying or selling the business for.
More than likely, there will be a counter offer to the original offer. You can then accept this figure or continue the ping-pong match with additional counter offers until a number is reached that is acceptable to both parties.
From years in the arena, this is what I have learned about successful negotiations:
- The services of a business broker as an intermediary in this phase can be valuable. If the buyer and seller negotiate face-to-face, chances are high that ill feelings will be aroused. Even some innocent comment by one of the parties is often times taken the wrong way and the whole transaction blows up. It’s an extremely sensitive phase of the process. (But hey, I’m prejudiced. I’m a business broker!)
- If you are a cash buyer, you’re in a stronger position to bargain on price. If you’re asking the seller to finance a significant portion of the purchase price, you still have some room to negotiate but maybe not quite as much.
- If it is not a distress sale, don’t expect to buy the business at a distress sale price. If it is a distress sale, the business is worth the depreciated value of the furniture, fixtures, equipment and inventory.
- If you’re going through a business broker, use him. He’s been involved in similar negotiations dozens of times before. At each step of the negotiations, ask him for his thoughts. You don’t have to take his advice, but asking for his input could be advantageous.
- Respect the other party. After all, you’re going to be working together and need to be on good terms during the training and transition phase after closing the transaction. Don’t make ridiculous demands (e.g.: “This offer is good for one hour only, take it or leave it.”)
- Don’t be “penny wise and pound foolish.” (Is that the right cliché?) Well anyway, you know what I mean. Don’t “lose the kingdom for want of a.… (Now I’m in trouble. I’ve forgotten the rest of that one!) I think you get the point.
- Relax as much as possible and always stay professional. Never loose your cool. By now, you’re getting pretty close to landing your own business!
Once you have come to an agreement on price and terms, move on to the next phase with all deliberate speed. The next phase is the due diligence investigation and is covered in my next post.
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