Negotiating with a business buyer
We show you how to keep a clear head when negotiating with a buyer.
Negotiating a deal to sell your business is very exciting. Naturally, it can also be very stressful.
When you’re close to hammering out a deal it’s important to keep a level head and ensure that you are totally happy with the outcome. We show you how to keep a clear head when negotiating with a buyer.
In the flurry of correspondence and numbers going back and forth, it’s possible to lose sight of your real reasons for selling. As you enter the negotiating stage, take the time to review why you want to sell and what you want your life to be like after the sale. Consider again whether you want:
Ideally, the proposed deal will achieve all or most of the goals you’ve identified.
Be prompt with all information and decisions, but don’t be rushed by arbitrary and unnecessary deadlines. This is a common tactic used by buyers to pressure a better price out of a seller. Listen to the counsel of your broker, accountant, banker and lawyer, and make the best decisions you can with the information available.
This is important to ensure that your expectations of a sale are realistic. Determining the market value of your business is a complex process best left to a Certified Business Valuator. The best time to perform a valuation is right after your year end when your company data is current.
A common valuation method is EBITDA or Earnings Before Interest, Taxes, Depreciation and Amortization. The valuator will take this number and apply a multiplier to it to determine the value of your business.
For example, if your EBITDA number is $500,000 and the multiplier is 2, the estimated value of your company is $1 million. If the multiplier is 5, your company is estimated to be worth $2.5 million.
The chosen multiplier depends on how the valuator perceives your company based on a variety of factors such as whether it can operate independently of you, has a unique position in the marketplace, has a diversified customer base, has growth potential, and more. The valuator will also consider the price that similar businesses have recently commanded.
The offer to purchase your business will take the form of a non-binding Letter of Intent. These typically include an exclusivity clause for a period of 60 to 90 days during which time the prospective purchaser can do their due diligence.
During this period, be prepared for the buyer to try to lower the purchase price based on their inspection of your business.
After the business buyer has completed due diligence, and a final purchase amount is settled, your deal will be documented in a Purchase and Sale Agreement. Review it in detail with your advisors to ensure that it clearly represents the deal you’ve agreed to. You will have many documents to sign that you should complete only with the advice of your own lawyer.
You can research the value of your business by using resources offered by your industry association. Or, consult with a professional Business Valuator. (Of course, it’s imperative to carefully check the credentials and references of any valuator you may hire.)
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