Negotiate from strength when buying or selling a business
Sanlam Financial Services - Thinking ahead in financial services
DON'T GET RUN OVER AT THE NEGOTIATING TABLE
Negotiating skills are critical when wishing to buy or sell businesses. Here are 3 similar case-studies, which have a direct bearing on the necessity of being able to negotiate to your best advantage.
If you don't get it right, you pay too much and inherit many liabilities you don't need and can be bulldozed into accepting things that you had no intention of conceding - you may not even know at the time that you are conceding them.
Always remember that what ever the seller wants, the buyer wants the opposite. The 3 cases are in respect of the auditor of the business for sale, valuing the business at R1million.
Case A - The seller wanted R1million. He stated that this had to be the price, because his auditor had proposed it.
NB: Valuation does not equal price. The figure given by the auditor, is for guidance only. In all my experience, I have never bought or sold businesses on the figure put on the table by the auditor. The buyer agreed to pay the R1million upfront, without questioning it and only performing a limited due diligence.
NB: It is advisable as a buyer to pay the price by installments, say over one year, preferably with the seller staying on for a reasonable period of time for the handover. Interest may have to be paid, but let the seller ask for it. In this case, when the wheels came off the business, the seller could not be found. The business went bust after 6 months.
Case B - In this case, the buyer was a better negotiator. When advised of the price, he said that it was far too high and that he wanted to carry out an extensive due diligence, which he did. As a consequence, he found many problems and then started to negotiate the price down.
He started low, knowing that the seller would come in high. His first price was R600,000. The seller came down to R900,000. The buyer went to R700,000. The seller would not go below R800,000. However, the buyer agreed and the seller accepted at R750,000 - provided that the seller stayed on for a reasonable period during the transition and that payment would be made in 3 equal tranches - on signing; after 6 months and after 1 year. No salary would be paid to the seller and no interest would be charged on the outstanding balance.
NB: If the seller's lowest price is close to the buyer's highest price, there is chance of a successful deal.
Case C - Turning back to the seller's position. When advised that the price suggested by the auditor was R1million, he opened at R1,3million. The buyer opened at R900,000. Eventually the deal was struck at R1,5million, provided that the seller would be paid a reasonable salary during the handover, payment would be made in 2 tranches - 70% on signing and 30% six months later, with interest paid on the outstanding balance.
Lessons learned are that sellers should always start high, against the buyer starting low - then the better negotiator wins. There are always many other permutations, which arise. If the buyer pays too much for the business, his chances of survival are remote.
Other aspects, which come into play, are -
- The seller will want to limit the warranties and indemnities he has to give in the sale agreement. He wants to exit with as little risk as possible - the buyer wants the opposite.
- The buyer wants to buy the business out of the selling company as a going concern - not taking the skeletons in the cupboard. The seller's shareholders want to sell their shares, so that the buyer takes over the selling company, warts and all.
Both of these aspects are very much part of the negotiations skills of the parties.
Others points to note are -
- Whatever you have negotiated, must be correctly recorded in the sales agreement.
- Don't rely on the other party's lawyers. Have your own.
- Timing - don't be backed into a corner.
- Don't agree to anything over the telephone.
- After each meeting, record what has been agreed and signed off by the other party for the next meeting.
- Always have a witness present.
- Be a good listener.
- Express yourself clearly - in writing and verbally.
- Stay in the match. Don't close the door.
- Don't agree piecemeal - discuss every issue first.
- Walk away if you are not happy. Know your shortcomings and utilize your strengths.
- Recap often and learn to caucus.
- Do your homework - know your facts.
Don't be afraid to say "No" and ask "Why" - negotiate from strength.
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