Factors to Consider When Negotiating a Value
When it comes to selling a business, negotiations may reach a stalemate when buyer and seller do not come to an agreement on the price or the way the sale is structured. This could happen because of many factors, such as a lack of understanding between the potential acquirer and the seller or lack of preparation on both sides of the table.
Here are some tips that a seller should consider when selling a business and negotiating a value.
- Timing the sale
Selling your business at the right time can influence the price of your business. Factors that may affect its perceived value include;
- external factors, such as the industry prospects and the general economy. Selling your business during poor economic conditions will lower its price.
- internal factors, such as lawsuits or expiring leases, and
- personal reasons, such as retirement plans, divorces, health reasons.
While it is difficult to time everything perfectly, you may want to consider working on some of the outstanding items, such as extending expiring leases or improving your receivables position before putting up the company for sale.
- Do not overprice or underprice.
To close a deal, it is important that business owners have realistic expectations of the value of their firms. Often, small business owners believe their business valuation should be worth higher than its true value because they base their valuation as a multiple of EBITDA or EBIT, whereas it should be based on seller’s discretionary earnings, which is typically lower than EBTIDA or EBIT. This is one reason many sellers walk away disappointed when they hear the potential buyer’s price offer.
Another consideration is whether minority discounts should be factored in the valuation. Acquiring a minority stake could limit the potential buyer’s ability to influence business decisions. A lack of marketability discount may also apply if your choice of sellers is limited.
Buyers are also more willing to pay a higher price if your firm has a strong competitive advantage, or if the acquisition will offer potential cost synergies or strategic advantage to their current operations. The same goes if your stake is a majority stake in the business.
Business owners should also understand if real estate should be included in the sale. Some sellers choose to lease the property to the acquirer post-deal. There are tax implications to be factored.
Hence, with all these nuances, conducting a proper valuation with your valuation professionals prior to the sale will help facilitate the sale process and derive the best value proposition for your business.
- Be prepared
It is advisable to do the homework beforehand to present your business in the best light. Get the necessary documentation ready for due diligence checks and ensure that your business is in tip-top condition. Some of these preparations include:
- Past 5 years audited statements.
- Strong order book
- Licences and approvals in place.
- Clean books
- Non-obsolete inventory
- Minimal contingent liabilities
- Include your advisors at the preliminary planning stage.
These include your valuation professionals, accountants, and lawyers. This can ease the process, minimise tax impact in negotiations and maximise your value.
- Understand yourself and your buyer’s motivations
Spend some time to understand your buyer’s intentions in acquiring your business. You may also want to find out if they have expressed interest to other similar firms.
Recognise clearly what you can give and take away during the negotiation process. This self-reflection is best done before negotiations.
Also, have in mind a price that you will be comfortable to accept. Understanding the recent transactions multiples in your industry and performing a valuation prior to the business for sale will also help set a realistic target price.
Being more informed will raise your bargaining power at the negotiation table.
- Consider stating the expected price upfront
Stating your expected price first may help shape negotiations going forward. This is best done if the seller is well prepared and confident about its pricing.
All in all, being prepared and informed will help raise your business value and your chances of clinching the deal. Hiring accountants, tax and legal professionals will help ease the complicated process and hopefully maximise the value for your business.