Here’s how to successfully negotiate a business purchase

The importance of negotiation in the purchase of a business cannot be overstated. Buying and selling is a two-way process involving a multitude of considerations, calculations, and compromises. Despite popular assumption, when you negotiate a business sale, it’s not just the cost of that sale that requires excellent negotiation skills, but factors such as insurances, construction period, suppliers and more. And that will form the basis of this article – how do you effectively negotiate a business sale while getting the best possible deal that leaves everyone walking away happy?

Why do you want to buy?

There are millions of SMEs out there – 2.4 million in fact, based on Small Business Statistics published by ABS. Plus, research by The ABS has shown there are 1500,000 more joining the AUS market annually. And at any one time, it is estimated that 15% of business owners are looking to sell. Needless to say, there is always an opportunity to get involved, somewhere. Even if a business doesn’t fail in those first three crucial years (and 60% do), it will eventually change hands – and when it does, you will want to make sure you can negotiate the best possible deal when deciding to purchase it.

A crucial starting point is to identify and communicate your motivations. Why this industry? Why this business and not one of the many thousands like it? What do you want to do after purchase and why? Remember, in the same way there are many businesses out there, there’s also a tremendous number of potential buyers, and so it is your job to demonstrate the highest level of respect to the seller and show them you care on a human level. So, the first step to negotiating is to be clear on your motivations and approach the potential deal with respect.

Know the buying process

A successful negotiation will only be possible if you educate yourself on the industry you’re buying into, the process of buying a company, the metrics used for a fair company evaluation, and the range of multiples required for properly valuing the company and industry you wish to buy in. Put simply? Knowledge is power, and equipping yourself with this knowledge will give you a solid platform to negotiate from. 

Know your numbers

Throwing any old number on the table is no way to conduct a business negotiation, and could be insulting to the seller, or a foolish error that gets you a bad deal. It’s therefore a wise move to arm yourself with an accurate and reliable independent valuation of the business you want to buy. This gives you room to negotiate if the seller asks for a higher price than the valuation dictates.

Many sellers think their business is worth more than it actually is – because other factors, like their love of the business, the hard work they’ve put in, and their personal attachment to the matter, can sway what they believe it to be worth in monetary terms. A valuation will be unbiasedly based on fundamental metrics like entry valuation, earnings multiples, asset valuation and more. Similarly, you can research comparable sales within the industry, to better equip you and your seller with a realistic offer.

Be aware, however, that valuations can incur fees, so ensure that you are keen enough on the potential business purchase before parting with your money. 

Acknowledge that negotiations are tough

Negotiations can get tenuous at the best of times, so it is good practice to clearly express your full intention to conduct a fair and reasonable negotiation. Set the stage by acknowledging with the seller that negotiations are a challenging step in the process, and that you intend to move forward with complete transparency and fairness. The seller will appreciate this approach and be more likely to share information with you in return.

Set your red lines

Compromise forms an integral part of any successful negotiation. But boundaries are important to ensure you get a fair deal. Before negotiations begin, identify a list of ‘red lines’ you are not prepared to cross. This might be a top-end figure you are prepared to pay for the business, or a contractual issue: for example, if the business is heavily reliant on the current owner, you might insist that they continue working with the business for a pre-agreed post-sale period. If you can feel yourself being persuaded over a red line, pull back and communicate the boundary with the seller, and why it exists.

Have a positive exit plan 

The fact is, around 1 in 10 business sale talks fall through before completion. It’s not ideal when this happens, but it is much better to walk away from an unsatisfactory deal than to spend many months or years regretting shaking hands. If your red lines are being crossed and you cannot come to a mutually agreed middle ground, it is better to leave the negotiations there. Ensure that any exit is handled with optimal respect, and keep a door open in case the seller changes their mind or alters their terms in the future. 

Negotiations should be win/win

The best negotiations when buying a business are had when both parties feel they’ve gained something of value. Getting to know your seller, their business, and what they want from the sale can help you to offer something they actually want. If you keep negotiations transparent, friendly, and aligned with your objectives and “red lines”, you have a better chance of bringing the purchase to completion and both parties walking away happy.