How to Negotiate When Buying a Business: Find the Seller's Achilles' Heel
Despite warnings to the contrary, some business owners attempt to purchase a business on their own - and succeed. Jamey Hamm, owner of Roots Cafe in Brooklyn, New York, negotiated the purchase of the assets of a business from the location's previous owner two years ago, and received a lucrative deal in return. Hamm wasn't even in the market for a cafe when he because a first-time business owner. He was simply a patron who mentioned to the previous owner that he might someday like to own his own business. Six months later, the owner, who was looking to sell the business, offered him the chance to live his dream. The former owner had bought the existing business from the owner before him, and had been unsuccessful in turning a profit. Hamm didn't have a business plan, nor did he have any previous experience in running a business. Within two weeks, he'd secured a private investor (his wife's grandmother), and successfully negotiated the purchase of the existing assets of the business for $8,000 less than the seller's asking price.
His negotiation tactics were not only based on his intuitive thought process related to the value of the items, but also to the fact that the seller was looking for a quick sell. On the other hand, he was unsuccessful at renegotiating the terms of the lease with the landlord. In this case, the landlord had the upper hand--the business was in a location that was ideal to him and close to his home, so he chose to forgo further negotiations in lowering the rent. "Negotiate to the point where it's worth it to you," he says. "I negotiated the contents of the business more because I knew [the seller] wanted to get out of [the business]. The landlord, she wasn't going to budge. I felt like I could make [the business worth the cost of the rent], and this is the area I wanted to be in," he says.
Dig Deeper: 7 Tips for Masterful Negotiating
How to Negotiate When Buying a Business: Make an Offer
Before you make an offer, take a good look at how much more money that offer will cost you. Does it require seller financing? Do you want the final sell of the business to be subject to certain types of performance criteria (that is, will the business have to perform a certain way for an established trial period before the final close)? One extremely important factor is determining if any of the existing inventory (if you intend to purchase the existing inventory) is obsolete. "The seller might not consider it to be obsolete but the buyer might consider it to be obsolete, so the value of the inventory might be different," says Landegger. "You want to offer a price that you think will be accepted. You can lowball it and expect the owner to do a number of different things," he says. "He can either say 'I'm not interested in you at all, don't talk to me again,' or he might make a counter offer," says Landegger. "Or he might accept; you never know."
As in the case of Hamm, Landgedder says that small business owners might have it slightly easier. "For a smaller business, a lot of owners truly want to get out because they're tired of the business or planning to retire," he says. In this instance, it's important to negotiate how long the seller plans to remain active in the business. The buyer will need to decide if she wants the seller to leave right away, or if she wants the seller to stick around a little while until she gets a handle on how to run the operation, should she she choose to keep it in it's existing model. In that case, a salary or some sort of compensation should be negotiated for the seller from the buyer, explains Landegger.
Dig Deeper: Buying a Business or Its Assets
How to Negotiate When Buying a Business: Secure Financing
In addition to hiring a broker, a buyer would be wise to seek the counsel of an accountant in order to make sense of the complex financial details of a business before either party signs off on any aspect of the sell. A valuation specialist may also need to be called in to provide a quote for the estimated business value. Once the logistics of inventory and business value have been worked out, the final step in the process is for the seller to buy it. Unfortunately, as it has been for the last few years, most banks are loathe to provide any type of business loans to buyers, especially first-time buyers, without huge amounts of red tape wrapped around numerous stipulations. As a result, your best bet is to seek out private financiers, namely family members or associates as Hamm did.
On the other hand, dealing with family may not be your best bet, says Thorsby. "The rule of thumb is to never do business with family. But usually colleagues, people you know in the community who know you [can be of assistance]. Maybe you've worked with them, [maybe] they've worked with you in some way that you have some business relationship as opposed to just family and friends," he says. As a negotiation tip for potential investors, you may attempt to offer your investors shares based on a future valuation of the business or even a percentage of ownership within the company.
"The important thing when you are buying a small business is that you are adequately financed so that you don't have to set record revenue numbers in a new business the first day in order to pay the loans," cautions Landegger. "People borrow too much money, and [they] can't pay their loan, and bingo, [they're] upside down and in bankruptcy." For this reason, and to receive the best deal that you deserve, negotiate the lowest price possible with the seller, and close the deal with the aid of a loan whose terms you've negotiated to best fit your financial situation. Most important, never accept the first offer for any loan or sell price and never be too eager to take "no" for an answer.
Dig Deeper: How to Close the Deal When Buying a Business
