For many business owners striking deals is a core competency. At any given time, a CEO might be involved in day-to-day transactions with customers and vendors, decision-making with colleagues and partners, or deliberations with senior management. But ultimately, negotiating and closing the sale of a business takes greater acumen, nerve and awareness than any other transaction in an owner’s life.
Ideally, an exit plan is devised on day one and baked into the business, making an eventual sale as strategic and streamlined as possible. Realistically, this level of preparedness borders on omniscience. It’s unlikely that any business follows a strict timetable, growing exactly according to plan. Whether the sale is impeccably planned or event-driven, a few basic guidelines can help a business owner more predictably drive a positive outcome.
Selling a business is a process that culminates in a closing. It takes time to build a team, market the business, conduct due diligence, negotiate and close. Start to finish, the sale of ones’ business could take over a year. Even with an eager buyer on the line, negotiations typically play out over several months.
Given the level of complexity of such a transaction, the last thing a seller wants is to be under the gun. Of course, some sales are forced by unplanned events — the three dreaded D’s, death, divorce, disease — but entrepreneurs will be best served to resist sacrificing process for pace. Shortcuts do not make a more efficient sale. The key is to be prepared enough to strike while the iron is hot.
Negotiating the sale of a business may be one of the few scenarios where it is best to recruit outside consultants. Even if for the ultimate sales mavens who claim to know all the would-be buyers, a business broker or M&A advisor can provide expertise that leads to a superior outcome. Not only do they have a specialized Rolodex of contacts, knowledge of business synergies and experience selling — or buying — similar businesses, but they allow a CEO to keep some focus on running the business during a critical time. An intermediary also provides cool-headedness during a sometimes antagonistic negotiation. Deal making has been described as 50% economics, 50% emotion.
Along the way and due to the complexity of the deal, an accountant and a lawyer may be required. Before a buyer comes to the table, a seller and his M&A advisor will have to assemble a mountain of bulletproof paperwork, including a business overview, client and supplier contracts, confidentiality agreements, insurance policies, relevant compliance reviews (if necessary) an up-to-date balance sheet, and at least the last three years of profit and loss statements and corporate tax returns.
The Devil is in the Details
Particularly in a transaction of such scale and complexity as the sale of a business, the details cannot be overlooked. Nobody likes surprises, least of all potential buyers. Resolving all outstanding legal or accounting issues before bringing a company to market can help avoid any peripheral concerns. Transparency is catnip for deal makers, instilling confidence and good faith where doubt once lurked. Cautious buyers do not pay a premium.
No Pain, No Mutual Gain
Negotiation has been dubbed the art of letting opponents have your way, but a more applicable — and political — definition is that negotiation grants each party what it wants most at the least cost to the other. Especially considering the lengthy, involved process of selling a business, the resulting deal should be viewed not as a zero-sum game but as a compromise that leads to mutual gain. A win-win between buyer and seller is not unattainable, but often takes months to finesse.
No matter how you define it, negotiation is a meeting of extremes, with the seller and buyer frequently at odds. However, hard-nosed negotiating does not preclude accommodation. While sticking points abound, including price, payment schedule, deal structure — the legal and financial form that the deal takes — a principled process will focus on compatibility, preventing hurdles from becoming landmines.
One of the main issues that is often overlooked in negotiations by the seller is the future of the company. Sellers that want too much and try to play hard headed most often lose the deal or put the buyer in a place where they are very unlikely to succeed. Neither of these outcomes are preferable to the seller. Most business owners started their business from scratch and always want to see the business continue to grow. This is hard to do without treating and looking at the buyer as a partner.
A seller needs to identify precisely what a successful sale means to them. This is not as simple as it sounds. Concessions will be necessary, so prioritizing goals — cash, a job, freedom from future liabilities — and identifying bargaining points is key. Sale price is often paramount, but it should not be the exclusive focus. Spending time on deal structure and evaluating the impact an acquisition will have on the business and its employees are important exercises for a selling CEO.
Fixating on price is myopic, and often creates an adversarial and unproductive negotiation. In order to settle on a sale price range, obtain a value from an M&A advisor, then identify a “best case” price before moving to a more realistic go-to-market price. This can be difficult for business owners, who tend to be generous with their own valuations.
Stand In Their Shoes
A seller should strive to understand the buyer’s motivation, finding a way to dovetail interests by evaluating the priorities of the opposing party. In-depth knowledge and understanding of the buyer not only encourages cooperation but can boost a seller’s bargaining power. Knowing what strategic value the deal holds for a buyer can help a seller command top dollar. Finally, do not build castles in the air: No matter how amenable a potential buyer seems, a letter of intent is not a blood oath. Business owners should always have a plan B if negotiations fizzle.
Of course, not every deal was meant to be. Never be afraid to walk away. If a negotiation does break down, end on a positive note, leaving open the possibility of resuming talks. However, never threaten to walk away unless it is genuine. This is not a bargaining tactic.
Inking the Deal
From pre-sale planning to marketing to negotiation, each stage should be used to strengthen the deal, not just entrench the seller-side position. What’s more, a deliberate and painstaking process not only reaps rewards, but does credit to the years of work a CEO spent building his business.
As a selling CEO, this will probably be the biggest deal of your life. Make the most of it!