Negotiating Price and Terms
Okay, you’ve found a promising business to buy, so now what do you do? The fun part of negotiating with the owner or broker, is about to start. When buying a business you will be dealing with a business broker, the Seller or an attorney acting for the Seller. I have found you will have a more difficult time in dealing directly with the Seller. This is because the Seller is more emotional about his business and usually hasn’t properly prepared himself or his business for sale. For example, he will want all cash, which rarely happens in selling a business. After reading this book, you should not let yourself get emotionally involved with the Seller. A good business broker, which is usually not a real estate person, will explain to the Seller how the market works and will evaluate the business, not under pricing it and not over pricing it, but finding the true market value. He will convince the Seller to offer terms. Be careful, some brokers will go along with the Seller’s dream price and list a business for sale, much too high, just to get the listing.
I n three months when the business hasn’t sold, he will go back to the Seller to renegotiate a lower asking price and terms. Track this type of listing. Visit the broker and go through his inventory of businesses for sale to find this motivated Seller. Sellers trying to sell their own businesses, simply do not know the rule of the marketplace and will try to sell their business before listing it with an agent. If you can find this Seller before he lists his business with a broker, you might be able to cut a better deal working directly with him. By this time, he is usually more motivated because his business has been lowballed a couple of times. At least three deals have fallen through and one was for all cash! He has been getting bad advice from everyone around him, including his professional advisers. His wife has already bought tickets to Hawaii and mentally they have both checked out.
Timing is everything! Negotiating becomes easier as the Seller becomes more motivated to sell his business. In other words, find a motivated Seller and you will be more able to buy on your terms and price. If a Seller is firm on his price, you must be able to negotiate flexible terms. If a Seller is firm on his terms which usually means all cash, then the Seller must be ready to accept a lower price for his business. I always try to choose both the price and terms whenever possible. Since most businesses are owner financed (96% sold businesses are owner financed) the terms of the sale are very important. Remember, you are a no money down buyer.
Don’t make the mistake many buyers make of being too concerned about the full price of the business. The terms of the sale can make or break the deal. If you could buy a business with none of your money down that would provide you with a better return on your investment than you thought possible, even after servicing the debt to the Seller, would you really care what the full price of the business was? I expect the Seller will have his business over priced from the start. I know it’s more than what he will really take. My offer will be below what I will be willing to pay. The terms you want are those that are going to service the debt you’re assuming. You want terms to match the cash flow you have projected.
If you are visiting the business for the first time, it is best that you don’t show too much excitement or enthusiasm to the Seller. If the business does make a good impression on you, try to conceal it from the Seller. Don’t be over critical, but it’s okay to make a small criticism about something. I try to find something to fault; the parking looks small, you need to have a stoplight, the show room is too small, etc., you get the idea. It doesn’t have to make sense. There is nothing to gain by giving the Seller the impression that you have a burning desire to own his business at this point. One thing you don’t want to do is criticize the Seller personally or his management style, even if it is bad, don’t mention it. Direct your criticism to features of the business, like the amount of rent being paid. Let the Seller do the talking. Ask lots of questions. Listen. Don’t interrupt. Be interruptible. Be a sharp listener, not a fast talker. You can listen your way into a sale. Always give the impression to the Seller that you can handle the financing. I like to leave the impression with the Seller that I am looking at several other businesses to buy that are good prospects and that’s usually true. I am qualifying more than one business. Why limit yourself? If I can’t obtain either my price or my terms, I move on. You can’t afford to waste time dealing with a Seller who might not budge. Move on to the next deal. Once you learn the process of finding a business for sale, you won’t lack for business owners to talk to. Don’t let the Seller or the broker blind you with all of the fancy reasons why his business is worth a small fortune. If I can get the Seller to give me the price he wants for his business, my immediate reaction will be that it is way too high. React to the situation the way that fits you personally. It doesn’t matter what his price is, it’s too high! Even if the price sounds really good, don’t let anyone know that you think it is a good price.
The next question I ask the Seller is how did you arrive at this price? Watch for his reaction when you ask this question and you must ask this question. The answer will vary, but if you are listening, you will uncover hidden signs that you will be able to use later on in your negotiations. One thing you can bet on, the Seller has learned to ignore the flaws in his business and they will always over emphasize the good aspects. Your goal is to bring the Seller gently back to reality and at the same time bring his price and terms back into the real world. Remember, the main reason that a business doesn’t sell is, it’s over priced! Most businesses will sell if put on the market at the right price and reasonable terms.
I figure if the business has been on the market for more than three months, the business is not worth what the Seller is asking. Always ask how long has this business been for sale? How many offers have you had? Did you try to sell your business yourself before listing it? It’s your right to ask these questions. This is no time to be shy. Don’t worry about offending the Seller or broker. These are bold questions and should be asked carefully, don’t push. Just ask in a straightforward manner. The Seller of the business has pain, you are there to help relieve him of his pain. Try to understand why the Seller is selling his business. The Seller probably hasn’t been asked these kinds of questions before. You need to ask lots of questions.
Herb Cohen, You Can Negotiate Anything, Says, "We don’t see things the way they Are, We see things the way we are."
What happens if you don’t sell your business for six months? What do you plan to do after you sell your business? The answers will help you determine just how motivated the Seller is. If he says he doesn’t have to sell and can wait as long as necessary to get his price, he’s probably just speculating and hoping someone will come along and pay his price. On the other hand, if he says he is anxious to sell because of health problems or wanting to retire and go fishing, you’ve got a better chance for your price and terms. These kinds of questions are leading you to the real reasons why the Seller wants to sell. He’ll tell you he has partnership problems, employee problems and personal problems.
All of these problems are pains. You relieve the pain. All you have to do is listen and determine where the pain is. If the pain is handling employees, stress your management skills in working with employees. You get the idea; his weaknesses are your strengths. It may seem to you that I am not concerned for the Seller during my negotiating. Not so. The best negotiating process is to try to understand the needs of the Seller and then try to structure your offer to meet these needs. You are trying to build trust with the Seller. You are not trying to create adversaries in your negotiations. You should be trying to build a friendship.
Here are a few offer strategies that I like to use; sometimes I use more than one. Tom Peters says in his book In Search of Excellence "The best strategy for success is Ready, Fire, Aim." (As opposed to the usual Ready, Aim, Fire.) He likes to try things out and then finetune his aim. Most people, on the other hand, are ready and aiming but they never pull the trigger. Try out a few of these offer strategies. Hopefully they will give you the confidence to pull the trigger.