Effective negotiation is a necessary skill to have in a business transaction, the following provides several areas that are important to an effective negotiation.
First, the buyer must know their highest willingness to pay, which should include the down payment and other financing details. The buyer also needs to have an understanding of the monetary amount needed to sustain the business and the buyer’s family, because without that knowledge, the buyer could pay more than expected and cause major disruptions in their lifestyle. If a seller is unwilling to be flexible, a buyer should know enough about the deal to comfortably walk away if they know the cost-benefit analysis does not support their decision to purchase the business. The initial offer price should not be too low, because the seller will not take your offer seriously and does not give the buyer a lot of flexibility to negotiate.
In most situations, the seller will do their best to negotiate for a higher down payment to owner financing to sell their business upfront. While providing the seller with a large amount down provides the buyer with more leverage or leeway in the deal, a large enough down payment may not be possible with cash or taking out additional loans from banks or other sources.
When the seller’s motivations are known to both parties, the buyer can appeal to the desires of the seller, such as offering a shorter transition period and keeping current employees or other options that will be ideal for the seller. Through this method, the seller may be willing to ask for a lower down payment and provide more seller financing.
Studying a specific geographical area and learning about the current market trends in the area can give you an advantage when coming to the negotiation table.
There are a number of tools that can help buyers stay up-to-date with the latest trends.
Vettedbiz.com, which has up to 1,700 franchises listed, provides frequent reports on business performance, and their average price and sales, giving greater insight into the business world in the U.S.
From the other side of the business transaction, sellers can learn about the facts on business valuation before presenting an offer letter or negotiating the right price for the business.
Before entering into an agreement and spending the time and money for the new business, it is important to do the research on the business, such as current market trends and current problems in the business. It is also important to take the time to get to know the seller’s motivation to sell the business because it could pull at the heartstrings and provide assurance to take care of the business that the previous owner worked hard at, which can be an important factor in negotiating the right price.
It is also necessary to protect yourself when you are entering into an agreement to buy a business. One strategy is including certain clauses in the agreement that will allow you to exit the deal if unforeseen events arise. Another protective tactic is to invest the down payment amount in escrow until the terms of the deal have finally been achieved. The amount of the loan ideally is also partially financed by the seller, because the owner shows that they have a vested interest in the business and will support with the transition. Banks like seller financing as the transitioning party has skin in the game.
It is important to find one area that is a deal maker, such as the reasons to sell the business, such as a quick exit. While negotiating a business deal is one of the hardest things a person can do, it can also be highly rewarding.
Thursday, September 30, 2020
12 PM Eastern Time / 9 AM Pacific Time