Why Is the Negotiation Stage Important?
When negotiating a business, the seller and buyer should ideally be in a win-win situation rather than a failed position. This requires building trust that will strike a satisfactory deal in minimum time.
A typical business sale can be drastically affected by the negotiation abilities of both the buyer and seller, regardless of how well-prepared both parties are. An incompetent seller can ruin all the hard work that has gone into the listing in just one negotiation session, and an unprepared buyer can offend the seller and lead to a failed negotiation. Both parties are equally responsible for closing the deal.
As a seller, when you have discovered the right buyer for your business, and your confident that they will take good care of your company, it will be time to negotiate. The buyer should have the cash or loan money to make this deal happen. Due to the complicated nature of business dynamics, open communication is a key aspect when it comes to concessions.
As a buyer, irrespective of what part of the business you are acquiring (the assets or shares, for example), negotiation plays a pivotal role. Negotiating is a part of day-to-day activities and formal transactions. When acquiring a business, various conditions are taken into considerations, including lease and other legal corporate contracts. In a scenario where these contracts are not taken seriously, you may need to visit a court to settle any legal or financial disputes. To avoid this, a buyer should aim to build a relationship based on trust and integrity, and goodwill should be fostered regardless of differences.
Businesses are increasingly being sold independently, and many business owners have learned how to prepare their organizations for sale and advertise them efficiently. However, negotiating without an advisory team can lead to shortfalls, as the negotiation involves contract conditions, legal and financial terms and other specificities that are challenging to understand. Having professional support can guarantee security and protection.
Globally, many sellers in the FSBO (for-sale-by-owner) market find themselves in this unwelcome predicament. Understanding how negotiations work will teach you to stand your ground and obtain every dollar you deserve.
Valuing your business is equally important. A business valuation is not only crucial if you require financing, but it will also attract investors.
Negotiating from a position of strength is the key to success in company acquisition. This guide will go over some ways a seller and buyer can position themselves positively before and during the negotiation process.
How to Negotiate a Business as a Seller?
A goal for sellers should be to attract multiple qualified buyers. This can be done by utilizing efficient and cost-effective marketing channels. But when it comes to negotiating your business, being prepared is the most important thing you can do.
Preparation is your key to success
Consolidate information around your business, like invoices from all employees and clients, lease agreements if relevant, a copy of the title, and sales history. If you can provide ample information, it will make a buyer feel like they are doing the right thing. feel more confident about buying your business. When it comes time to analyze offers, give priority to anything that is unconditional, even if it isn't the greatest deal.
Be patient but keep it moving
Don't sell your business too quickly. Owners in haste to accept an offer and move on can lose tens of thousands of dollars. Handle your potential buyers effectively, as this can yield significant dividends. Don’t be afraid to make counter offers. Keep the process alive by jumping between values. Things could get interesting if a new, unexpected offer is placed on the table. But, while you want to remain patient, you also need to keep the process moving.
Understand the other party
As a seller, you want to know how many potential buyers there are in the market, and what their knowledge is of your sector. Will your business be in high demand? And what can you do to increase its appeal? During negotiations, your advisory team should understand how serious your buyers are and what elements will affect what they’re willing to pay for your company.
Keep your emotions grounded
The truth is, both buyers and sellers need to make complex decision based on logic and the present market rather than on emotions. People who are selling their businesses are likely to be emotionally attached to it, and these emotions can hinder progress if they are left unchecked. While the negotiation process does have an emotional element to it, your decisions should be based on facts, accurate research, and industry conditions.
How to Negotiate a Business as a Buyer?
As a buyer, you will want to haggle the best deal you can for the company you want to acquire. Whether you are experienced in negotiations or just starting off, you want to make sure that you are familiar with every corner of the business, including its sector. Here are some useful tips to help you succeed in your transaction.
1. Documentation and Dealing with the Right Person
You should never engage in negotiations with someone who lacks necessary negotiation skills. In the same breath, too many middlemen might spoil the negotiation.
Along with that, it’s crucial that you write only what you're willing to live with. You will be tied to an item once it is written down. Be mindful that a seller’s advisory team can use anything that is written down as a bargaining chip.
2. In-depth Research
Do your detailed homework. Consider asking your acquaintance how they've handled similar situations in the past. Pay attention to all the details including names, dates, background, and other data. Verify information if necessary until you feel comfortable enough to associate yourself with the project. It’s your right to conduct research around assets and their value prior to buying. Weigh the pros and cons on the entity in detail, especially if it’s cross-cultural.
4. Let no Salesman Ride your Emotions.
If you're a customer who might fall victim to a salesman's deceptive methods, this is the most significant bargaining advice for you. You should be wary of salespeople who try to come into your personal space and take advantage of your emotions to gain an edge.
As a result, be sure to have all your facts and objectives ready and keep the conversation professional and structured. This will alert the seller’s team that you mean business.
5. Willing to Accommodate
This is another important aspect of negotiating. There needs to be a certain amount of compromise in this transaction. Concessions and adjustments are crucial. Your counterpart should be aware that you are assuming a lot of risk in this acquisition, so they need to take it seriously. Likewise, the seller is giving up something that is valuable to them, so you need to be respectful. Flexibility is a key aspect here, but make sure there is a balance of power dynamics. Never give something up without getting something in return.
6. Conduct Due Diligence
Gathering and researching financial records, business operations, and legal documents are of utmost importance. They will help you identify the risks and opportunities you will take on board post-sale.
Here are some items you should review during due diligence :
- Licenses and permits
- Contracts and leases
- Status of building and workplace environment
- Equipment and fixtures
- Assets, inventory, and liabilities
- Various internal matters unique to the business
For financial due diligence, ensure to examine 3 to 5 years of financial data. This includes tax returns, sales records, profit and loss records, balance sheets, account receivables and payable records and cash flow statements.
Business Negotiation Strategies
Negotiating is not an easy task. It is rigorous and often a tiring pursuit. It requires years of practice, research, and support. To prepare you, here are some strategies you’ll apply to your real-world business transactions:
Problem Solving: work toward a win-win situation
Negotiating is about addressing problems in a creative way. Find out what the other party wants from this transaction and present an agreement that meets the needs of both sides. You will need to examine issues and scrutinize documents before finalizing long-term agreements. Sometimes, you will need to think of alternative ways to resolve issues.
Timing and Targets
Take time to strategically think and plan your proposals, gather information, and develop tactics that are suitable to your situation.
Once you are confident you are on the right track, give your negotiation partner a deadline to accept or reject your offer. Make sure you’re prepared for counteroffers and stick to any deadlines. This will demonstrate you are serious about your targets and milestones, and that you want the transaction to be as structured as possible.
Using negative body language when confronted with an offer you don't like might be a subtle but powerful bargaining tactic. It's not uncommon, for example, to show signs of discomfort (without being rude) if someone offers you a bargain price you don’t like. Flinching communicates your reaction on a visceral level, and it may force your partner to re-calibrate their expectations.
However, when necessary, you can concede a point that might not be important to you but is important to the other party. This is valuable in negotiations and a respectable gesture.
Use BATNA if you reach a stalemate
Both parties should be willing to forgo their ideal outcomes and should be adamant about their goals. But it is possible for a negotiation to reach a stalemate. In this case, using a BATNA can be beneficial. A best alternative to a negotiated agreement does involve a significant amount of compromise in comparison to an ideal business resolution, but it can mend deal-fatigue or avoid conflict.
Business Negotiation Examples
Negotiating with Retailers
It might be difficult to get your goods into retail outlets. As multiple merchants compete for a piece of the same pie, shelf space is expensive real estate. It's vital to remember that shops have their own goal in mind, which is to increase revenue through selling things to customers. Keep the following tips in mind when approaching negotiations with retail buyers.
Delight Them with Data
During discussions, your main goal should be to demonstrate how your product or service will benefit the retailer. The most effective approach to do this is to provide purchasers with hard data that demonstrates your brand's established track record and ability to handle and harness consumer demand.
Be Open to Partnerships
Since retailers are a big participant in getting your product into the hands of consumers, having a solid relationship with them is critical to fulfilling your company's goals. The goal of these types of negotiations should be to satisfy all the parties involved and establish good terms. To accomplish this, your organization must be willing to disclose useful information with the retail buyer. This kind of transparency will build trust and encourage them to share additional information with you.
Negotiating with Clothing Suppliers
When you're looking for ways to save money, you'll want to hone your negotiation skills with bespoke clothes suppliers. It may appear difficult to reach a satisfactory agreement, but it is not impossible.
Be fearless, but not aggressive
Successful negotiators remain assertive and dispute areas that have the potential for bargaining. Assertiveness entails asking for what you want and refusing to accept a negative response. Express your feelings without becoming anxious or angry.
The significance of developing a relationship with your clothes manufacturing firm cannot be overstated. Demonstrate a warm demeanor and look for areas of mutual benefit. Explain how the supplier will benefit if the accept your offer.
Aside from the financial aspects, you can discover some other areas in which both of you are interested and have authority. Discounts for larger orders, delivering ahead of schedule, and providing a free product design service are just a few examples.
Negotiation Preparation Checklist
There is a lot of financial and legal documentation involved in the negotiation process, for both large and small business acquisitions. Here are some important documents to consider for both buyers and sellers:
Checklist for sellers:
When negotiating or closing the sale, you will need to agree with the buyer on:
- Sale price
- Handover or managing training
- The deposit amount that is usually 10% of the sale price
- Period for settlement
- Arrangement for existing staff
- Assessing the corporate environment and structure
When preparing the contract, you will need to check your territory or state for any special requirements. Be open to the solicitor checking your contract. This is to ensure that all aspects of the sale are covered, including:
- All assets are transferred rightly including fittings, fixtures, and equipment
- All liabilities, including creditors and lease
- Employee entitlements, including bonus and managerial issues
- Contingency statement, e.g., if errors are later found in the contract
When finalizing tax and legal issues, you need to consider if capital gains tax and goods, and services tax applies to your business acquisition. Consider insurance requirements, and if you cannot pay your taxes in a time, consider payment plans.
- After the business is sold and it is transferred to the new owner, tick the following checklist:
- Transfer of lease, licenses, and permits
- Cancelling the ABN and business name
- Finalize instalment notices, activity statements, and tax returns
Checklist for buyers:
As a buyer, you will need to consider the following items:
- Licenses and permits: are all the licenses and permits required up to date?
- Contracts and leases: is the landlord agreeing to transfer the lease? Will the new lease need to be negotiated?
- Agreements: are the outstanding agreements between the seller and suppliers settled?
- Status of plant, equipment, and fixtures: are they in good working order and licensed?
- Assets: what assets does the business hold? Is there any intellectual property?
- Inventory: how is the inventory managed, stored, and distributed?
- Liabilities: are there any outstanding debts? What’s the credit history? Do any refunds and warranties exist for the business? Are there debts owing on assets that are registered on the Personal Property Securities Register ?
Ensure that the following financial records are examined:
- Tax returns
- Business activity statements (BAS)
- Sales records
- Records of accounts receivable and payable
- Profit and loss records and other amount earn
- Balance sheets
- Cash flow statements
Negotiating a business is a complex process with multiple considerations. While it can be tiring, being meticulous and taking this journey step-by-step will benefit you. The most important thing to remember is to conduct granular research in advance, and to be strategic in your tactics and clear in your expectations. Seeking support and advise from entities that specialize in industry-specific acquisitions is highly recommended, considering the legal and financial nature of buying or selling a business.
The negotiation process is not always clear-cut. You may experience unforeseen problems, deal fatigue, conflict, and frustration. While this is common, there are steps you can take to mitigate unwanted circumstances. For further support and advice, you can contact us .
Now, go and achieve your goals!