When you sell your company, you’re likely to find yourself negotiating with sophisticated buyers. Business buyers have several advantages over sellers, which you’ll have to overcome when negotiating a sale:
1. Balance of power.
In any purchase transaction, the buyer tends to have leverage over the seller simply because they have the money that sellers want. This leverage puts buyers in the driver’s seat when a deal is negotiated. Without knowing how deals are typically structured and what’s “fair”, business owners may unknowingly give away key deal points. Tough negotiating sellers who try to counter the buyer’s leverage with sheer stubbornness risk alienating buyers and killing a deal.
Most business owners only sell a company once in their life. Maybe twice. Business buyers, on the other hand, usually have significant experience with mergers and acquisitions (M&A). The M&A process is very specialized, with its own vocabulary and customs. The better you understand that process, the less likely you are to be taken advantage of in a negotiation.
You probably have a date for an exit in mind. As time passes, you may get more anxious, and maybe even desperate - and this can work against you in negotiations. Business buyers, on the other hand, rarely have a defined timeline. Even if they’re under pressure to grow through acquisition, they’re not likely to feel pressured to buy YOUR company over another.
You understand the nuances of your business better than anyone, but you’re also emotionally attached to the business, which can make it hard to negotiate in a dispassionate way. Experienced business buyers understand and anticipate the emotional roller coaster that sellers experience and use it to their advantage. For them, it’s just part of “the game”.
How you can level the playing field
Protecting yourself in a business sale involves a deep understanding of the process and careful planning.
Use time to your advantage: The best way to maximize your leverage in a sale process is to begin planning and preparing your company several years in advance. Owners who wait until the last minute (because of burnout, a health scare, imminent retirement, etc.) play right into the hands of opportunistic buyers. A prepared seller can capitalize on unexpected opportunities that arise ahead of schedule or wait patiently until the time is right to sell.
Build a stronger business: This seems obvious, but the way to add value to your sale is to make your company as strong as possible. That means working on value drivers such as a capable management team, a diversified customer base, pristine financials, strong cash flow and more. If you challenge your own management assumptions and find new ways to grow your business, you create momentum that buyers value. The best time to sell is when you’ve just had a record year and you’re well on your way to another one.
Learn as much as you can about exit planning and selling a business. Stay abreast of deals in your industry. Find other owners who have sold their companies and pick their brains. Better yet, talk to people who have acquired other companies and develop an understanding of the buyer’s perspective.
Know your business’ value: Pay for a professional business valuation as soon as you begin planning your exit. There are many reasons to get a business valuation and planning for the eventual sale of your business is first among them. It doesn’t have to be expensive, but it should be performed by an objective outsider. A valuation will guide your financial planning and help you prioritize efforts that are most likely to increase long-term business value. Too many owners have an idealized view of their company’s value, only to find out that buyers see their value very differently. Getting an objective valuation is a critically important first step in selling your business.
Create a market for your company: A valuation is important, but it’s only a guidepost. Ultimately your company is worth whatever someone is willing to pay for it. The way to maximize that value is to create competition for your company. It’s tempting to reach out to a few obvious buyers when it’s time to sell, but it’s important to go beyond your immediate competitors, customers and suppliers and to market your company to as many prospects possible.
M&A Advisors Shift the Balance of Power
The most effective way to counter the many advantages that buyers enjoy is to engage an M&A expert who can help you to see your company from a buyer’s perspective. They can estimate value, prepare effective marketing materials, expose your company to a wide range of potential buyers and manage a competitive process that drives buyers to their best possible offers. After signing a letter of intent (LOI) to buy your company at an attractive price, experienced buyers often have a deliberate strategy of beating the price down during the due diligence process. An advisor will know how to defend against these purchase price adjustment tactics.
With an advisor to manage the sale process, you can focus your energy where you can add the most value - improving your business and creating the momentum that will cause buyers to pay a premium. Your advisor will represent your interests and manage any contentious issues that arise during negotiations so you can stay above the fray and preserve an effective working relationship with the buyer - who you will probably have to work with after the close.
An effective advisor will earn their fee many times over. Indeed, the mere presence of professional advisors tells would-be buyers that you’re serious, that they’ll need to compete for your business, and that you will not be taken advantage of.
If you’re not sure about how to engage the right advisors, this article on Finding the right advisors to sell your company will help.
Selling a business successfully requires the same level of planning and effort that it took to build it, but the stakes are higher. You may only have one chance so it’s important to get it right the first time.
Recognize that buyers have certain advantages that you will need to counter to be successful.
Make your company as valuable and attractive as possible.
Plan your exit well in advance. Don’t let it be a fire sale.
Get a professional business valuation so you have a realistic idea of what your company is worth and how you can increase that value.
Reach out to a wide variety of potential acquirers to create competition for your business.
Consider engaging a qualified M&A advisor who can guide and protect you through this process so you can be confident that you aren’t leaving any money on the table.
About Venture 7 Advisors
Venture 7 Advisors was built from the ground up to help business owners grow and successfully exit their companies. We think like business owners because we are business owners. Venture 7 partners have owned and exited more than a dozen of our own companies. We offer practical business advice here on our website, through public speaking engagements and through professional publishers and development centers such as CFO.University. We encourage business owners to Contact us for a free brainstorming session. No sales pitch, just business ideas and support from seasoned owners like you.