Negotiation—the Three Essentials for Selling a Business

December 21, 2016Exit Strategies, Selling a Business

Negotiations always present a fascinating dance. Two parties come to the table, each making calculated moves: going forward, to the side, and often around in circles. At various points throughout the routine, they move around the floor far from their finishing places. Dancers may step away from their partner, even sprinting to the other side.

Yet, the two come together to conclude their presentation and take a bow to the crowd for their finale.

Unlike what many believe, the goal of negotiations is not for one party to “win” and for one to “lose,” but rather for each party to conclude the dance where they want to be, happy with their final performance.

I’ve been mastering the art of negotiations since my youth exploring the markets of Tijuana. Despite the price difference between trinkets sold on the street and business owners selling a business built over thirty years, the basics of negotiation always remain the same.

You have to dance the dance.

Setting Expectation

Prior to diving into heated negotiations, at Exit Consulting Group, we work with our clients to set the stage. It’s important to have a clear understanding of expectations and goals prior to putting a deal together. Just as the dancers have their steps outlined, we need marching orders from the client on what they want from the exchange. Far too often, the buyer or owner realize midway through the deal that they have a sticking point no one knew about, which blows the deal up. Part of the preparation, and to avoid any unexpected hang-ups in the middle, is to walk through the three essentials with every client.

Next is to prepare the seller for the back and forth. Our mantra when it comes to negotiations is that if we haven’t walked away from the deal, then we haven’t negotiated hard enough. In order to do the negotiation properly, you need to be willing to walk away. A large percentage of that is knowing what your walking away points are.

Essential One: Identifying Wants

When you invest decades into building a business, it becomes an extension of yourself. It’s hard to boil that down to a single dollar amount and walk away. While we occasionally encounter a business owner whose only goal is to leave with a check, it’s the rarity. Instead, owners want to maintain their culture, protect relationships with key clients, sell to a family member, or keep a specific competitor away from their legacy. There’s typically some aspect of the business they have specific ideas about going into the transaction.

All these wants need to be identified upfront.

Essential Two: Defining Terms

Most sellers come to Exit Consulting Group singing the same tune, “I set the price, and you set the terms.” At face value, this seems logical. Unfortunately, the devil is always in the details.

Terms dictate a multitude of issues, including sticking points such as cash after-tax or financing terms. Terms matter. Buyers want to put as little down as possible, where as sellers need them to put as much down as the buyer is capable. Whether selling to a complete stranger or a family member, you will need to know how will you be paid and over what time frame. Will you continue on with the business for a time? If so, how long will that be?

This takes up the meat of the negotiation. Here we create the deal specifics and address the overlooked items such as tax ramifications, risks, liabilities, and financing. None of these are small potatoes. They need to be carefully crafted to protect your assets and give you the most after-tax dollars possible. 

Essential Three: Establishing Price

Finally, we get to number three. Our biggest hurdle at Exit Consulting Group comes down to price. When selling your business, our goal is to value your business based on market conditions and get you as much after-tax dollars as possible. Business owners attribute sale price to pride in their business, meaning they want to sell it for a more impressive number. Sales price and after-tax dollars are two vastly different numbers.

Here’s the secret they don’t tell you about selling your business: the sale prices don’t matter.

Now, before bringing out your pitchforks let me explain. When we start negotiations, we start with sales price. It’s the easy entry point, but in reality it all comes down to the after-tax cash you take home. In reality, many business owners need to receive a specific amount from the sale to fund their retirement. While no one can sell your business for more than it’s really worth, we work to best achieve your future financial needs.

The amount of money you walk away with is our ultimate goal, not the number that you can tell colleagues.

Partnering With An Experienced Team

Much like the art of dance, the skill to negotiate a deal of this size is mastered over time. At Exit Consulting Group, we help mid- to large-sized company owners execute their transitions, which include overseeing the negotiation between buyer and seller. From preserving your legacy to building out the terms that get you the most after-tax cash, we work with you throughout the entire process.

If you are considering selling your business in the future, contact us today. Together we can help you design and execute your transition.