Negotiating a Purchase Price of a Business

Negotiating a Purchase Price of a Business

Negotiating the purchase price of a business is much like negotiating the price for a house. There is a lot of communication back and forth between the potential buyer and the seller. As a buyer, you want to have a price at which you wish to start negotiating as well as a price you cannot exceed. Knowing your limits will help you walk away from a deal that is not in your price range. Being prepared for this process can help you be much more successful at negotiating a purchase price and closing the deal.

Understand Emotions

First, there are many emotions involved when working with the seller of a business. Understand that the seller has put a lot of blood, sweat, and tears into growing their business. It is important for you as a buyer to be empathetic and understanding.

While many business owners seem to be ready to sell their business after it is said and done many have remorse. A business owner goes from working 12-16 hours, to much less. Having a plan post selling is important for a seller. Otherwise, many end up wishing they had not sold their business.

Create a Plan for Moving Forward

Next, when buying a business, you want to put forth the best case on how you are going to keep the legacy of the seller alive. This includes your vision for the company. As a buyer, it is also your job is to sell yourself as much as it is to evaluate whether the company is a good fit for you.

A few factors a seller may care about include: Will you operate the business in a way that will make them proud? Do you plan to keep current employees? What are your plans for the business? Open communication is key throughout the negotiation process. And be sure to always treat the seller with a significant amount of respect.

Support Your Purchase Price

The seller wants to get a price close to his or her asking price. However, the asking price may not always be what the business is worth. One of the best ways to understand the value of a company is by obtaining your own business valuation from a credible third party. Peak Business Valuation, business appraiser Texas, loves to help you understand the value of a business and create an argument for the purchase price.

While you may be willing to transact at the listed price, obtaining a business valuation can help you understand whether the business supports that purchase price. And the valuation can help you understand the strengths and weaknesses of the business. Peak Business Valuation, business appraiser Texas, spends time with each buyer helping to identify risks. These risks may warrant a lower purchase price. Understanding each of these items can help when you are negotiating a purchase price. Obtaining a business valuation is also an important part of the due diligence process.

Involve a Professional Negotiator

While there are dozens of books, blogs, and articles on negotiation tactics, hiring a professional can be the most helpful. Hiring a business broker, lawyer, or another mediator can help both parties arrive at a fair purchase price. An intermediary can also help to mediate strong emotions from either party. Keep in mind these individuals have more experience and asking for advice can be valuable. We at Peak Business Valuation, business appraiser Texas, do our best to work with the buyer to present support for the purchase price. Ultimately these individuals have more experience when it comes to negotiating the final transaction.

Be open when Structuring the Transaction

If you offer $900,000 for a business listed at a million, most brokers or sellers will kind of laugh at you. However, there are many ways to structure the transaction to bridge the gap between $900,000 and a million. Often the terms are much for flexible than changing the actual face value of the deal. Know what items you are willing to compromise on as well as key items that you do not want to negotiate.

Typically, a seller will want as much cash upfront as possible and a short period of financing. Offering a larger down payment can give you more leverage during negotiation. Coming up with additional cash for a down payment or bank financing can help supplement the seller financing.

Price is only one component of the transaction. One individual may offer a higher overall price but require more seller financing and a longer stay-on time. Whereas, another buyer may offer a lower price, but have less financing or stay-on requirements. The seller will most likely choose the buyer that helps meet their end goals. And someone who will continue to keep the legacy of the company going strong.

There are many strategies for structuring a business transaction. When we work with buyers, sometimes the value of the business comes in lower. In this case, we try to educate and look at different angles to negotiate and structure the transaction with them. Keeping the seller involved for a period and incentivizing them with a performance or a delayed payment plan is common for many transactions.

Financing the Transaction

Last, unless you are an all-cash buyer, you are going to need to finance the deal. One of the best programs to work with is the SBA. An SBA loan has competitive terms. Most SBA loans require you to put 10% down. One of the requirements for an SBA lender is to obtain an independent third-party business valuation if the loan is more than $250,000. Peak Business Valuation, business appraiser Texas, works with SBA lenders across the country providing SBA business valuations. We are happy to connect you with a lender who serves your industry and can meet your business needs.

Keep in mind if the valuation the lender performs comes in with a value that does not support the loan or the purchase price, they may recommend you renegotiate with the seller. You may need to change the terms of the deal to either put more money down or have the seller finance more. Doing so reduces the risk for the lender to help you better qualify for the SBA loan.

Seller financing is a common way to aid in structuring a transaction. This option gives the seller the potential of earning more money as they take part in the growth of the company. Earnouts are also common. With a certain amount upfront and the rest paid out over time. Both earnouts and seller financing often include the seller staying on for a certain period. This can help to ensure the transition is successful and the company continues to produce. For more ideas on financing a transaction, read Financing a Business Purchase.

Summary

Negotiating the purchase price of a business can be a stressful process. But with the right tools, you can be successful in closing the deal.

If you are looking to buy a business, Peak Business Valuation, business appraiser Texas, is here to help you do it with confidence. We are here to be an advisor and partner and to see you succeed. Helping you understand the value of the business and what drives that value is key. If you have questions about buying a business, feel free to reach out. We are always happy to answer any questions you may have. Schedule your free consultation by clicking the link below.

 

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