Virtually every small business seller has the same goal: to sell their business quickly to a competent, capable buyer and for a high price. Selling quickly is achievable. Sellers can improve the speed of the sale with preparation and preplanning. Selling to competent, capable buyers is achievable, too. Sellers can define their target buyer and narrow the pool of buyer candidates to those with the right sets of skills and experience. But it’s the third point that causes many sellers to stumble. Few sellers know how to ensure that their business will sell for a high price. In this article, you’ll learn proven strategies to help you negotiate as you sell your business. What will it take? Extensive prework and mastery of key negotiation tactics.
What kind of prework?
At least a year before selling your business, you should take steps to position your business for a high-priced sale. Here are some of the strategies you might use:
Recasting your financial statements to favor business profitability over tax savings.
How this will help: This move will help you showcase the year-over-year profit potential of your business.
Ensuring that your financial records are complete and accurate, your inventory management is up-to-date, and your taxes are in good order.
How this will help: Completeness and accuracy in your records are important to buyers. Both demonstrate your integrity and thoroughness to buyers, which will help you gain their trust in later phases of the sale.
Assessing and countering the risks and weaknesses that plague your business.
How this will help: By finding and eliminating pain points, you can improve the parts of your business that may turn away buyers or cause them to reduce their offer prices.
Implementing systems and processes that help your business run smoother, faster, and more effectively.
How this will help: You can show your buyers an impressive operation that validates your asking price.
Enacting initiatives that boost your employees’ happiness, morale, and loyalty.
How this will help: You can improve the odds of employee continuity and reduce turnover. Both are significant value-adds for new owners.
Training a manager or a key member of your team to take on your day-to-day workload.
How this will help: You can present your buyers with a self-sustaining business that they can operate with little involvement and with minimal upheaval through a transition.
Adopting green practices that are important to the environment and, quite likely, to future buyers.
How this will help: You offer a key differentiator in your market that buyers can use to attract future employees and customers to the business.
Once these strategies are in place, plan to attain a valuation of your business, its assets, and (if applicable) its real estate. This valuation should provide you with a high- and low-end estimate of your business’s fair market value, which should serve as the baseline for any offers that you accept.
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You'll likely list your business at the higher end of its valuation range—most sellers do. With the right marketing tips, you’ll be able to demonstrate why your business is worth that price.
What kinds of marketing strategies should I use?
Plan to create written and verbal presentations that help potential buyers understand the history, status, and direction of your business.
With a broker or by using our guide, you should prepare two materials:
- A one-page summary of your business that you’ll use to attract a wide market of buyers
- A polished 5- to 10-page prospectus that provides information about the business’s products, competencies, market, and competitive positioning
Both materials will help you capture a potential buyer’s attention and entice them to learn more about your business, so they should be prepared with care. Consider including photos, references to awards or accolades, and parts of your day-to-day marketing collateral to show the potential of your business.
After preparing your written materials, plan for the verbal discussions you’ll have with potential buyers. Start by preparing a short, compelling story about the history and status of your business. This story should help potential buyers understand the value of your business and the opportunity that it can provide to the next owner.
Next, try to determine which parts of your business may raise buyers’ questions or cause concerns. Prepare thorough, truthful responses that will help your buyers feel assured that an investment in your business is a sound decision.
|Key takeaway: More than anything else, your buyers will want to see that you are earnest and forthcoming about the strengths and limitations of both your operations and its market and that you’re committed to preparing the future owner for all that the business entails.|
Your preplanning and marketing efforts should help your pool of potential buyers understand both the value your business represents and your asking price in relation to that value.
Still, few buyers will present a full-price offer, even if the asking price seems on point. That’s why it’s important to prepare for negotiations.
Be ready to show that your business is worth the price.
How can I prepare to negotiate as I sell my business?
There are six strategies you should master to understand your buyers’ aims and persuade them toward your asking price:
Understand your buyers’ perspectives.
First-time business buyers may worry about the transaction and their ability to recognize red flags. They—and seasoned business buyers or long-time business owners, too—may be suspicious of your motives to sell, the figures that you report, the opportunities that exist in your market, and the other factors you report to be true of your business.
What to do: Consider the risks, red flags, and concerns a buyer may perceive in your business. Speak honestly and openly about them to build trust with your buyer. Then, explain the steps you’ve taken to mitigate them and how future owners can take steps to reduce them further.
Read Too Much Risk: The Parts of Your Business That Will Scare Off Potential Buyers for strategies to help you with this tactic.
Ignore claims that they’re considering other opportunities.
Every buyer considers multiple opportunities before choosing a business to pursue. However, some will tell you that they’re considering other deals to pressure you to act quickly or deliver more for less money.
What to do: Move forward with discussions without allowing this news to sway you. Show patience and confidence in your business, and communicate your desire to select a buyer who is genuinely interested in its success. This will help you to demonstrate that you aren’t in a position where you need to succumb to pressure tactics.
You hold the power, and you have the luxury of choosing the right buyer.
Start with the issues that aren’t likely to be debated.
Most offers include terms that require little-to-no negotiation between the buyer and seller. Post-sale transition plans, the timeframe the buyer needs to complete due diligence, and the target close date are terms that most buyers and sellers can agree to without much tension or debate.
What to do: Ease into the negotiations by settling on the terms of issues that are unlikely to be debated. Try to reach a consensus on as many small items as possible to show good faith and a desire to work cooperatively through the more difficult points of the discussion.
Most buyers pride their shrewdness. They will nitpick and negotiate every part of your business to drive down the price and attain better terms. They want to demonstrate to themselves and others their mastery in business and their ability to get more than what was offered.
What to do: Offer them some victories. Set your price a little higher than you’re willing to accept and set terms that allow for some flexibility so that buyers can negotiate some small wins.
You can counter their pressures for a lower price or more favorable terms than you’re willing to provide by offering benefits that have little or no cost to you. These benefits may include free post-sale consultations, introductions to key industry contacts, systems training, or promises to continue sending leads after you depart from the business.
Circle back to the sticking points.
In many negotiations, there are points of contention that buyers and sellers struggle to work through. These points, big or small, can prevent both parties from working through other aspects of the deal. And, in some instances, they can derail the deal altogether.
What to do: Pause the discussion and ask the buyer if you can circle back to the concern after discussing other key parts of the sale.
Asking permission is important. It empowers the buyer to make a choice, which can motivate them to act decisively on the decisions that lie ahead.
After the buyer agrees to press forward, try working through an issue that isn’t likely to cause much debate. Later, as your negotiations wind down, look back at the points of contention and decide whether you’d regret allowing those issues to hold up or undermine the entire sale.
Offer seller financing.
Some buyers ask for a lower purchase price because they don’t have the means to cover more. They may not understand that there are loans and other financing options that can help them afford your business.
What to do: Consider offering to finance a portion of the purchase price. Using seller financing, you can provide a loan, which the buyer can repay with interest according to the terms you agree upon.
With this tactic, you can alleviate the burden the buyer faces of affording the upfront cost. Plus, you set yourself up to make more money on the deal with a higher price, interest, and the possibility of spreading the income over the sale over multiple years to reduce your tax liability.
Read our article, Smart Play: Seller Financing, to learn more about this option.
Many of these points assume you’ll be handling the negotiations on your own. However, you can ask an attorney or your broker to navigate this part of your sale for you. Intermediaries like these have experience in negotiation, and they can remain unemotional through the discussions, which is a surprise challenge for many business sellers.
Whichever course you choose, you should be prepared with the knowledge of the value of your business and the minimum price and terms that you’ll accept to move forward.
When you’ve reached negotiations with a buyer, you’ll have completed most of the hard work that comes with selling your business.
Still, several important tasks remain. First, you should devote time to learning about some of the terms your buyers may request, including seller financing and earnouts. These guides can help you boost your knowledge:
Then, you’ll need to meet with your attorney to review the written offer your buyer presents. You should also spend time planning how you’ll manage the proceeds of your sale and reduce the tax liabilities that may result from it. A wealth planner can help you with these important tasks.
Interested in connecting with a wealth advisor? Check out these firms:
Selling your business is a complicated process. We have articles and advice that can help you with every action you need to take. Log into your owner’s portal for free, personalized guidance that will help you succeed with your sale.