by Bruce Tannas
You have looked at various Canadian businesses for sale, narrowed your search, completed your due diligence, and considered how to finance your acquisition of a small business. Now it is time to negotiate to buy the business. This article will help with some tips on how to negotiate buying a business and drafting a solid business offer to purchase.
Before You Negotiate:
You need to understand that, for the owner of a small business, selling their business likely represents several different interests and motivations. Their business is their work, and that work likely forms part of their identity. In fact, many owners have a deep pride of ownership in their business’. Their business also involves an obligation to their employees, suppliers, and creditors to continue in the future. Finally, because they are selling, the business needs to help fund their post exit plans. As a result of all these motivations, most sales of a small business are more than a simple transaction for the business owner.
Most business owners are looking for a successor so they will be very interested in you and what you bring to the table. As you complete your pre-negotiation due diligence, use this time to also get to know the business owner and let them know a little about you as well. According to an article in Forbes, “Studies have shown that revealing some information, even when it’s unrelated to the negotiation, increases the outcome.” So don’t be afraid to put something of yourself, your experiences, and hopes on the table so the owner can understand you a little more. The Forbes article also points out that people tend to reciprocate with more information when we offer some first.
Also, during the due diligence phase, don’t be afraid to ask some personal questions from the owner about their motivations including:
- Why are they selling their business at this time?
- Who do they see as a good successor for them in the business?
- What are the owners’ plans for the future?
- Do they want to be involved or see a role for themselves in the business once it is sold?
- What are the owners hopes for the business after they exit?
When you understand the owner’s motivations, you will be able to craft a better proposal to buy a business and understand their response to your proposal.
Tips on Negotiating to Buy a Business:
The owner may have engaged a valuation from an accountant or business valuator to justify their asking price. But the asking price of a business is usually not the price it is sold for. At the end of the day, the final price will be what the owner is willing to sell for and what a buyer is willing to buy it for. As a buyer, you need to understand how small business valuations are usually done. That way, you will have a method to decide and justify the price you should be offering for the business you’re interested in purchasing.
The negotiation, for the purchase of a business, involves several items that go beyond price. So, while price is important, don’t just focus on price when you negotiate as the terms may be as important as the overall cost. There will be several items that need to be settled in the negotiation including price, sale structure, terms of the Vendor Take Back (VTB) Mortgage (if needed), take over dates, ownership participation, etc. One way to ensure that these are not missed, is to write a list of what you want and need to ensure that the deal goes forward. Then rank the list in order of importance. Ask yourself if there is anything on the list that would cause you to walk away if you didn’t get that as part of the deal? Rank those items at the top followed by other things that you may be able to compromise on.
You should know what your bottom line is for each item to be negotiated. Know what you’d like and what your walk away is. Finally, remember to keep your emotions in check as you negotiate. There are likely to be several rounds of offers and counter offers.
Drafting an Offer to Purchase:
As your offer will inform the final purchase contract, we strongly suggest that you get legal help in drafting it. Having said that, you should ensure that the offer covers the main points of the sale including:
- The overall purchase cost (including taxes)
- The structure of the sale (asset, share sale, or hybrid)
- Terms of any VTB Mortgage
- The terms of any future involvement in the company by the current owner (if any). That could include anything from a short transition period, where the owner provides training and introductions to suppliers and customers, to a more extended period where the owner has ongoing responsibilities within the company.
- Equipment that you want included (or not) with the deal.
- The dollar inventory amount that you want included. As well, you may want to specify any ‘dead’ inventory you don’t want included (or offer a lessor amount for that inventory).
- Any other key terms such as the owner agreeing to sign a non-compete agreement, etc.
In addition to things that you want, there are likely a few conditional items that are needed to proceed with the deal. These items can include anything that you think would make you walk away from the deal if they were absent such as financing, landlords permission to transfer of the lease to your company, etc..
This article has provided a few key tips on how to negotiate buying a business and drafting a solid business offer to purchase. The negotiation truly begins during the first meeting so be prepared to share something of yourself and don’t be afraid to ask personal questions, that way both sides will understand where the other is coming from. Also, before you negotiate, do some homework and have a sense of what you’d like and what your walk away is for each aspect of the negotiation. Finally, when its time to draft an offer, get professional help and ensure you cover the key points of the sale in your purchase offer.
Connect4Commerce offers entrepreneurs and small business owners across the country a convenient and comprehensive place to connect, exchange goods and services, and advance their businesses. Be sure to check out further articles in our Small Business News blog for additional resources. Also, find professionals on our site that can help you with buying or selling a business.