Negotiating the Sale of a Business

Feb 13, 2018

The successful negotiation of the sale of a privately held company or family business to facilitate retirement of current ownership is a sophisticated process requiring knowledge, experience, and a strong professional skill set.

A transaction of this nature offers a level playing field for negotiations where both the seller & buyer have straight forward motivations to enter negotiations, but also vested interests in achieving a “fair” deal.  The seller in a retirement sale is motivated to negotiate in “good faith” to achieve the goals of retirement & a fair market value for their business.   The buyer is motivated to achieve the goals of a fair market value for the business and an entrepreneurial opportunity that will offer an appropriate return on investment for the associated risk.

It is the job of a business broker to facilitate these negotiations on behalf of their client to a successful outcome.   The first step in the process associated with achieving a successful business sale is to value the business correctly.  Commonly the most confrontational element of a business sale negotiation is the negotiation over price.  The parties have conflicting interests in this area with the buyer wanting to purchase the business at the lowest possible price while the seller wants to achieve the maximum value possible for their business in the sale.  Confrontation in this area can be mitigated by valuing the business correctly when it is brought to market.

It is my professional opinion that like any investment (Real Estate, Stocks, Bonds, etc.) the market value of a business can be determined by a party with appropriate knowledge & experience.  A proper business valuation incorporates accounting & investment models with market conditions.  It has been my experience as a 24-year professional selling privately held companies and family owned businesses that knowledgeable & experienced business appraisers, mergers & acquisitions professionals, accountants, and bankers will arrive at substantially similar business valuations within a 10% range. If a business enters the market within this range, the road to agreement on price between the seller & buyer is generally not overly difficult to achieve for a professional facilitator.   If the business enters outside of this range, it will either result in a value proposition for the buyer and the seller leaving dollars on the table or buyer frustration because the seller is not starting their negotiation from a position of knowledge.

Second to properly valuing the business prior to bringing it to market, the most important element needed to negotiate a successful business sale transaction is an environment of trust & full disclosure between the parties.  If the parties do not trust each other, it is very difficult for them to negotiate in “good faith”.  Similarly, if the parties do not have appropriate information to make prudent business decisions it is difficult for them to negotiate in “good faith”.

The sale price of a privately held company or family business is the most significant hurdle in negotiating the purchase & sale of a business.  If agreement is not reached on that issue, there is no need for the parties to spend time, energy, and resources negotiating other elements of the transaction.   However, once it is established that the parties are on the “same page” in terms of price then there are numerous other issues that the parties will need to negotiate to satisfactory “middle ground” to successfully complete the transaction.   These transaction components include a spectrum of business, accounting, and legal issues that will require information & knowledge to successfully navigate to agreement.

Business issues to be negotiated between the parties in most business sale transactions include the vehicle for payment of the purchase price (e.g., cash, promissory note, royalty, earn-out, etc.), the length & amount of transition training by the seller of the buyer, and the term & geographic area of the non-competition agreement provided by the seller to the buyer. Each of these have market standards based on the type of business and dynamics of the specifically contemplated transaction.   An experienced, knowledgeable business broker can provide information on what is standard & reasonable to their client to assist with facilitating “good faith” negotiations from a position of knowledge.

Accounting issues to be negotiated between the parties in business sale transactions include the tax allocation for the transaction and how accounting systems will be transitioned with proper allocation of responsibility for trailing liabilities.   The most significant issues to be negotiated in the sale of a privately held business from a legal perspective relate to the representations & warranties made by the parties to each other.  An experienced, knowledgeable transaction team including a business broker, accountant, and attorney can provide information on what is standard & reasonable to their client to assist with facilitating “good faith” negotiations from a position of knowledge.

There are many excellent books that outline all the components of a business sale that should be negotiated, however just like following a recipe in a cookbook the quality of the execution of the process impacts the result in a business sale.   Successful negotiation of a business sale requires a set of specialized professional skills.  It is recommended when selecting a business broker to negotiate the sale of a business that an entrepreneur select an individual that is an effective communicator across multiple platforms (Email, Phone, and In Person), a good listener with a strong experience & knowledge base to draw from when providing guidance & facilitating negotiations, and a superior problem solver who can quickly assess a situation and articulate options & solutions to the parties.  It is also important that the negotiator is trustworthy.  As Mahatma Ghandi said, “It is difficult, but not impossible to conduct honest business”.   In general, people do business with people they trust.  This applies to the buyer, seller, and the business broker in a negotiation related to the purchase & sale of a privately held company or family business.

Successful business sales occur every week in the Pacific Northwest.  IBA as the premier business brokerage firm in the region traditionally facilitates 3 – 7 transactions a month for our clients.   The professionals at IBA are willing & skilled negotiators. Many people are uncomfortable or hesitant to enter negotiations.  We are not.  We welcome the opportunity to help our clients achieve their retirement sale goals.  As John F. Kennedy famously said, “Let us never negotiate out of fear. But let us never fear to negotiate.”  Please contact our office if we can provide you with information related to negotiating the sale of a business.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.