How to negotiate the sale of your business

Most business owners negotiate with suppliers, customers and other stakeholders on an almost daily basis. That said, knowing how to negotiate the sale of your business is a whole different game, demanding strategic navigation of complex terms and high-stake decision making. 

With all sorts of issues being raised during this phase of the selling process, it can be a difficult time for vendors. However, if you understand how to approach this make-or-break milestone effectively, it is possible to close the deal despite competing objectives. 

Below, we share advice on how to negotiate the sale of your business for an optimal outcome so that you can succeed at this stage without the stress.

 

How to negotiate the sale of your business: 8 tips for success

1. Do your research

In a business negotiation, it always pays to be equipped with the most precise and comprehensive information. Before you begin, make sure you have considered the transaction from the buyer’s perspective and researched all relevant issues they may raise. 

Conduct due diligence in advance, understanding the value of all assets, market activity and comparable prices so that you are not taken advantage of. It is also a smart idea to consider any liabilities or lawsuits that may affect this sale. 

 

2. Understand the potential buyer

On a related note, do your homework on the buyer to determine why they are so interested in purchasing your business in particular. 

What goals are driving their desire to own it? Are they thinking of buying any other similar businesses? What is the lowest and highest they could be willing to pay? How quickly do they need to close this deal?

This in-depth knowledge can serve to boost your bargaining power, as you’ll have a better idea of what the buyer may be willing to compromise on and which terms will be more challenging to negotiate.

 

3. Make the first offer

It might seem counter-intuitive, but there can be a significant advantage to laying your cards on the table first. Your opening offer will act as an anchor for ensuing discussions, often setting the general range for the entire negotiation. Indeed, research has suggested that the first price stated has a significant impact on proposed figures throughout a negotiation. 

Of course, this tactic is most effective when the seller has a strong advantage, such as another interested party. If this is not the case, it may be more strategic to wait and see what price the buyer is willing to start negotiations at.

 

4. Be clever with concessions

Concessions are inherent in any negotiation, and therefore play a key role when it comes to how to negotiate the sale of your business. 

Both parties must be prepared to make some compromises. As the seller, it is critical that you keep your goals top of mind throughout this negotiation and ensure that you receive something in return whenever you make a concession. 

To achieve this, highlight your concession to the buyer so that they are aware of its value and will be more likely to respond in kind.

Without a reciprocal arrangement in place, you may find that your slight concessions soon escalate to notable compromises. Not only will you feel as though your business is not being valued fairly, but the buyer may become hesitant to settle, always striving for a better deal. 

 

5. Know your bottom line and respect it

Tunnel vision is all too common as negotiations continue, especially once you have invested a considerable amount of time and energy into the discussion. In such situations, it can be difficult to call it a day and walk away – but this may be the right decision for your business and future.  

Before you enter a negotiation, determine your “walk-away number”. This is the absolute minimum sale price you are willing to agree to in order to close the deal. Take the time to really consider this final figure, which should take both market trends and your business’ true value into account.

Defining a walk-away number can help you to stand your ground if faced with a deal you feel is unfair. If you do decide to turn down a buyer’s offer, make time to reflect on this decision and consider what actions you could have taken to achieve a stronger outcome in the future.

 

6. Do not disclose certain details

As soon as you show the buyer that they are leading negotiations or you are feeling under pressure to accept an offer, they will inevitably press further. 

Unfortunately, the reality is that buyers tend to have more flexibility than sellers when it comes to time and options. Therefore, if you share any details relating to deadlines, a lack of interest from alternative buyers or other limitations on your side, they will likely use this information to strengthen their bargaining power. 

Consequently, you should withhold any information that does not need to be disclosed under the terms of the sale and could be used against you during the negotiation. 

 

7. Set clear terms and conditions of sale

One of the most essential tips on how to negotiate the sale of your business? Don’t focus exclusively on the money. While the selling price is of course a crucial component of negotiation, it is far from the only one. 

The terms of your sale are also incredibly important, detailing critical information regarding the future of your business, team and financial circumstances. Make sure you have accounted for all key factors and documented their terms on paper:

• How will the payment be structured?
• Will an earnout be included and if so, for what financial goals?
• Will current employees be retained? 
• Will senior management be restructured or replaced?
• Are there any break clauses?

You must also consider contingencies or conditions that must be met before the sale is finalised, such as an:

• Audit of your business’ finances
• Earnest money deposit or receipt of escrow
• Evidence that a lender has qualified the buyer
• Acceptable transfer of commercial property lease

You may also wish to include certain covenants, which are promises from one party to the other to respect certain agreements. For instance, as the seller, you may gain compensation in return for making a:

• ‘Business as usual’ covenant to refrain from entering any new agreements, updating products or services, changing customer service levels etc. between now and the sale; or
• Non-competition covenant not to steal customers from or provide the same offering near the new owner.

 

8. Seek professional advice

It is likely that it is your first time selling a business, as most people only navigate this type of transaction once. If you are unfamiliar with such negotiation and the process as a whole, then seeking professional advice from experienced specialists can prove invaluable.

Put together a powerful team of advisors to assist you with legal, tax and financial matters during the sale process. As well as partnering with a trusted and qualified business adviser whose approach aligns with your ambitions, it is particularly useful to gain support from an experienced business lawyer who can help you to understand your rights and responsibilities during negotiation. 

Not only will this ensure you abide by all legal requirements, but you will also be better positioned to identify opportunities that will maximise your bargaining power.

 

Get legal support with your business sale

Armed with the above tips on how to negotiate the sale of your business, you are one step closer to closing the deal successfully. If you have any further questions or would like to learn more about business negotiations, please contact our experienced business lawyers today.