You have dreamed of owning a business. Now that you have found the right one for you, negotiate to buy the business. Do not be saddled with terms that can ruin your opportunity before it even gets started. Negotiations will evolve so you must have an open mind and a “can-do” attitude to produce a deal. Think about the points to be negotiated, what your position is and what your rebuttal will be for the seller’s comments. Here’s how to make sure you get the best deal when buying a business.
Prepare for the negotiation.
Study market dynamics, the competition, supplies market, and industry statistics of comparable businesses sold to come up with the proper valuation. Shop around for the best account deals – interest rates, loan terms, penalties, etc.
Assess your finances and structure payment accordingly.
Know your upper limit spending. Offer a minimum figure you reached through your own valuation. Provide supporting reasons and proof how you derived this figure. Ask “what if...” questions to lower the confidence of the seller regarding his or her asking price. Use market fluctuations and economic factors to your advantage. If a third party will finance the sale, make sure the sales deal is contingent on obtaining that financing.
Get as close as you can to the seller’s down payment figure but negotiate for some concessions in return. Ask for reduced interest on the balance of the purchase amount, a grace period of 3 to 6 months on the first payment, no interest for the 1st year, no penalties on early payments, and the like. When you give something to satisfy the seller, you should get something you need in return.
Consider an earn out.
Earn outs are resorted to if there are valuation gaps to bridge. For example, if the seller of a business for sale wants a higher price for the company, the buyer can suggest an earn out (contingent on future earnings) while committing to the higher price. Risk is reduced because part of the purchase price is contingent upon good performance of the business. The buyer usually pays 50 to 70% of the purchase price up front with the remaining 30 to 50% structured as an earn out and paid over a period as the acquired company achieves certain performance criteria, e.g., profit or a certain sales level, retention of specific clients or vendors, or other contingencies over a specific period following the closing of the sale.
Have a positive relationship with the...