8th May, 2019
Getting the best deal when buying a business (or selling one, for that matter) boils down to one key factor – preparation. In this article, Renae Smith explains how to get ready to make the deal of a lifetime.
So you want to a buy a business.
Having a solid plan and ensuring you strategically approach all aspects of the transaction, from the first conversation right through to the signing of contracts, is essential to make certain you don’t end up with a bad case of buyer’s remorse.
While haggling is a necessary part of business buying, there’s plenty that needs to be done before you start to negotiate on the price.
Whilst the prospect of buying a business can be quite exciting and many people want to get straight to the haggling, it’s essential to take time to consider all aspects of the new business and to ask as many questions as you can, well before you start negotiating on the price.
A business owner should show the upmost respect to any potential buyer and be willing to answer any reasonable questions about the business in order to gain the trust of the buyer.
If you find that a seller is hesitant to work with you or supply information, warning bells should ring.
Your preliminary analysis should begin by working out why the business is for sale.
While asking the seller is a great place to start, it’s also worth doing some of your own digging and understanding the perception of the business is within the industry, as well as within the consumer base.
Once you are confident in the businesses position, you need to understand the business outlook for both the immediate future, and the long-term future.
Is the current business setup secure and likely to remain profitable, or does the business require changes?
If the business is on shaky ground, which is often why many owners are selling in the first place, you need to work out if you have the skills or expertise to turn the business around and get it back on the right track.
Talk to existing customers, suppliers and vendors and ask them about their relationships with the business.
Speak with relevant credit organisations to ensure there are no financial aspects of the business that will affect your reputation going forward and make sure there are no outstanding complaints against the business practice as a whole.
If, after you’ve gained a full picture of the business, you’re ready to move forward, the next step is to negotiate the purchase price.
Working out exactly how much to offer for a business can be difficult, but a general rule is to never agree to the price first quoted by the seller.
Gaining advice from a qualified business broker or having them negotiate for you is a great idea, but if you’re going to go it alone, it’s important to prepare every step of your negotiation.
The buyer should lead negotiations and should express their intention to conduct a fair and reasonable negotiation from the very beginning. Buyers should never be offensive or over critical as this will immediately put the seller in a defensive position.
While being fair, your initial offer should always be as low as possible. This price should be one that you can back up with metrics and reasoning, but also one that is not so low that you will offend the owner and potentially damage any relationship you’ve been building.
A great way to practice negotiating is to role play with a colleague or partner and to ask them for feedback. Make sure you’re suitably educated in the industry the business resides in, the general process of buying a company and the types of metrics that you have used to evaluate the company in order to make your offer.
Relationships, attitude and demeanour are valuable tools in negotiation and can make or break a deal in an instant.
If you’re finding that negotiations are not going your way, a great negotiating tactic is to pause negotiations and respond to their offer with lots of ‘what if’ questions.
By asking more questions about the ongoing management of the business, the owner will be assured that you are still considering the purchase, but also be alerted to the fact that you are committed to due diligence.
When an offer is rejected, it’s essential to understand why.
Asking for specific feedback as to why they’ve rejected an offer can help you understand what’s important to the seller and make your negotiating more effective. This can also help develop trust and connection between the parties as everyone feels like their needs are being discussed and considered, ultimate leading to an agreement everyone is happy with.
Purchasing a business isn’t always an easy process, but with patience, planning and a clear strategy from the very beginning, it’s possible to ensure both parties sign the contract feeling like they’ve received the best deal possible.