How to Negotiate When Buying a Business
If you're naturally gifted in the art of negotiation, buying a business will put your skills to the test. If you're not, you're going to need to brush up in order to successfully undertake the process.
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"Negotiating is an entrepreneur's most important skill," says Jessica Mah, the 20-year-old founder of the start-up InDinero. Before one buys a business, he or she will need to have a proper negotiation strategy in place in order to get the best outcome from the deal. Indeed, the process is different depending on what type of business you plan to buy, if you intend to purchase the rights to the name of an existing business, whether or not you wish to acquire the contents of the business, or if you want to only purchase a businesses' assets.
For small business owners, it is wise to educate yourself about all of the potential pitfalls of your purchase long before you get the ball rolling and certainly before you attempt to place your John Hancock on any official document. Negotiations to contracts existing and implied should be completed before you sign anything, and documents regarding such should be reviewed by your legal counsel for best results. The following will guide you though the proper process of negotiating one of the most life-changing endeavors that you can undertake for better or worse - buying your own business.
How to Negotiate When Buying a Business: Vet the Market
Depending on the industry you're involved in, methods of negotiation may differ. Certain businesses, namely those that cater more toward industrial services and materials for example, will need to negotiate based on market fluctuations. You can prepare for this by studying trade publications and attending networking events for those in your industry.
When vetting the marketplace, George Landegger, the managing partner of Sunbelt of Westchester County in New York, suggests using economic factors to your advantage when you begin negotiations. For instance, you can say to a seller, 'I really want to be in this business but prices are rising and I really don't know what's going to happen in the future. There's a lot of uncertainty here and [to make my business viable], I can only offer you this price,'" says Landegger.
How to Negotiate When Buying a Business: Making First Contact
There are many ways that you can find a business to purchase. If you live in a small town or in a city with many independently-owned businesses, you may be able to start the process of negotiations through word-of-mouth or personal business contacts. You may even be able to reach out to a potential seller through the use of social media, or via numerous online buyer/seller websites that can be easily discovered through a simple Google search. It's even possible to find a business to purchase through the usual online marketplace suspects, such as Craigslist and Ebay.
In addition, there are many business websites that you can go to that cater specifically to the buying and selling of businesses, including Bizquest, BizBuySell, and MergerPlace. Another is InfoUSA, says Landegger. "If there's a specific type of business you want, you can go to one of these companies that have lists like InfoUSA and you can buy a list and you can search by SIC code, which is the government definition for different types of businesses. Every business has a SIC code. So, if you're looking for a specific type of business, you can find a resource [through the website] and then actually knock on the doors of those businesses saying, 'I'm an interested buyer and I'm considering buying your business,'" says Landegger.
After making contact with the seller and determining their legitimacy through a publication such as Crain's, the Better Business Bureau, LinkedIn, Google, or Facebook searches, or even through mutual associates, the next step should involve a face-to-face meeting, preferably on location at the business in question. But, before you go about taking the next logical step of making a formal offer, halt! Before you say anything that can color any future negotiations, consult professional counsel, namely a broker.
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How to Negotiate When Buying a Business: Hire a Broker
You may think your Google searches and Amazon book purchases have adequately prepared you to buy a business, especially if you're a first-timer. However, there's no substitute for actual experience, and buyers who go at it alone are often blindsided by unforeseen issues that arise during the process.
"Obviously, I have a bias," says Mark Thorsby, president of the International Business Brokers Association based in Chicago. "First thing you need to do? Get a broker," he says. According to Thorsby, he's seen "hundreds, maybe thousands" of clients attempt to navigate a business purchase without proper counsel in the beginning, only to have to hire a broker before all was said and done. Thorsby describes the buying and selling process as being much more detailed and intricate than novice buyers imagine, an art if you will.
There are many aspects that need to be negotiated when purchasing a business, many more than in a typical real estate acquisition."As an example, often what you're paying for is the book of [a] business," says Thorsby. This is also referred to as the goodwill of a business. "That is, the customers that a business has acquired over time," Thorsby explains. "Under new ownership, you hope that you would be able to keep all the same customers as opposed to starting a business from scratch and having to acquire all new customers. So, what are those customers worth to a new owner of an enterprise?"
In addition to existing customers, should you choose to continue the legacy of the previous business instead of altering the focus of the establishment, there many be tangible assets (machinery, vehicles, kitchen equipment, etcetera) that will need to be negotiated as part of the purchase agreement. Unfortunately, there is no rule of thumb as to how much goodwill or assets are generally worth. That is where a broker comes in. According to Thorsby, one of the best attributes of a broker is that they've had extensive experience in comparing prices across a specific industry in a specific region. Thus, they can determine if the asking price of a seller is a good one or if they're attempting to take you for a ride.
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