5 Negotiation Tips for Business Deals (Part 3 - Buying and Selling Small Businesses)
(For those just joining us, this is the third in a seven-part series on how to buy or sell your business. Please see the prior blog posts for more context.)
For me, negotiation strategy is the most fun part of doing deals. In most cases, there is a price range where the deal is perceived as a win-win to both the buyer and the seller (I call this the “Win-Win Window”.) As the buyer or seller in a given deal, you want the final deal terms to fall closer to your end of the favorable price range.
So how do you make the deal go in your favor? In my experience, it comes down to how large of a Win-Win Window is there and what can you do with your negotiating partner to move the deal to your side.
Here are a few tips from the many negotiations I have participated in:
- Negotiations Are Partly About Ego. Sure, there is a real purchase price number everyone has in their minds, but that number is not usually what decides the price. The seller may have set the price based on what they paid for the business or what they believe it is worth. The seller may have an emotional connection to the business and see the price of the business as the price of their worth.
If the Seller’s number is too far away from the buyer’s Win-Win Window, a deal cannot be reached. But, what if you can get a large amount of seller financing and the seller will spread the payments out over a very long period of time with no personal guaranty? In that situation, the deal may be worth it to the buyer – even at a price that was previously out of the buyer’s Win-Win Window.
- Don’t Be a Jerk. Try to be nice and cordial to your negotiating partner. They don’t have to love you personally. But, it doesn’t hurt. And they cannot hate you. Personal animosity kills deals.
- Try Not To Make the First Offer. The first offer sets an anchor for future negotiations. If you come in too low as the seller or too high as the buyer, you have lost your future opportunity to optimize. You will never get that back. For this reason, it is better to let the other side make the first offer so that you can see what ballpark the offer is in. If they will pay you $500,000 and you were going to ask for $100,000, you can see how important this concept is. If you have to make the first offer, make it a big enough number that it exceeds your expectations and you will not ask what might have been in the future.
- Multiple Lever Strategy. I like to ask for a lot of things in the LOI, whether I am a buyer or a seller. Each ask creates a new negotiation lever that will have winners and losers. Some of those things will be important to you and some will not. You can give up the items you don’t really care about as a concession later in the negotiation in exchange for something that you care very much about that you previously would not have gotten without the other side perceiving that they gave something up to you for you to get it.
- Pretend You Don’t Really Care. Playing a little hard to get never hurt a negotiation. I am not saying that you should fail to answer phone calls or return emails quickly. But, especially before an LOI is signed, you are building a relationship with the negotiating partner. Better to be mysteriously warm and quiet than to be annoying and overzealous. (This one is just my opinion.)
- Make Sure You Are Protected By Contingences In the LOI. Put so many contingencies in the offer that even if they sign it and “make it binding,” you can control whether the contingency happens or not.