Negotiating a Business in the USA

Why is The Negotiation Stage Important?

Negotiating is a skill that requires years of practice to perfect. While negotiating amongst family or friends may be easier and more casual, business negotiations require far more meticulous research, transparency, and legal and financial assistance.

Due to the nature of business negotiations, a strategic and goal-orientated approach is required. A seller wants the highest price for their business, and a buyer wants the cheapest option. While this journey needs to be defined by some sort of self-interest, it is also a professional arrangement that requires cooperation and targets that should be met. The bargaining journey requires a give and take approach, and the end goal should benefit both parties. The negotiation stage is your final hurdle. Your preparation, strategies, and understanding of agreements will determine the outcome, and your execution will have an influence on the outcome. Ask yourself comprehensive questions concerning this process before you begin.

Every selling or buying experience is different. Each will have its own circumstances, methods, and specificities, so each negotiation process will be unique. If you feel you may need to retrace some steps, look at our guide on selling a business or our guide on valuing a business. To assist you in the negotiating process, this guide will offer helpful advice, strategies, and examples for sellers and buyers.

The Seller

To kickstart the process, a seller should begin by ticking some preliminary boxes. Firstly, you’ll need to hire an intermediary that will advise and support you throughout the process. You’ll also need to devise a pragmatic asking price for your business based on a valuation. This valuation should account for your assets, your business’s market value, the value of your premises and the value of your shares.

Once you’ve begun advertising your business for sale, your advisory team should begin to screen potential buyers or investors.

Formulate a strategy and prepare

As the business owner looking to sell, you probably have all the relevant information around your business to execute a successful deal, but you will also need ample knowledge regarding your potential buyers, and the skills and strategies needed in a negotiation.

It essential to conduct preliminary research on buyers. What are their goals, requests, and preferred outcomes? What questions and concerns will they bring up in meetings? Do they have the finances and resources to develop your business? Familiarizing yourself with the interests of your counterpart will help you understand their goals and objectives, and ultimately set a professional tone for the rest of the negotiation process.

You’ll probably have a face-to-face meeting with potential buyers, so it’s crucial to set a clear agenda for the meeting. Ensure you equip yourself with possible questions the buyer might ask, and set your intentions and goals, including milestones and targets you’d like to meet during the negotiations.

Maintain a transparent arrangement

Getting a deal done with favorable terms that both parties agree to is important, but to get there, you need to establish a professional and collaborative partnership.

While American business culture can be direct, it should not be aggressive or confrontational. Both parties want to get a rewarding outcome and will have bargaining strategies in place to do so, including strategies that may annoy or fatigue counterparts. However, you should never intentionally offend or insult anyone. Negotiations are agenda-bound, so avoid being too flexible with your approach.

Compromise is important in negotiations, but if the buyer is demanding deal terms that are unrealistic, stand your ground. A seller needs to find the balance between being assertive and being accommodating.

Be thoroughly prepared for due diligence

Due diligence is a significant phase in the negotiation process, for both the seller and the buyer. To assess the value and transferability of the business, a buyer and their advisors will investigate the business from head to toe. They will closely assess its financial records, legal and regulatory procedures, stakeholders, premises, lease details (if applicable), assets and inventory, market conditions, and the reasons for selling the business. This is done so the buyer can understand the risks and opportunities involved in the acquisition.

As the seller, you should be thoroughly prepared for this. Ensure you have all documentation ready on request so the process can run smoothly, including information on the units of your business that may not be performing that well. If you are willing to cooperate, it will demonstrate that you are serious about closing the deal.

Another factor to consider during due diligence is that your valuation is likely to fluctuate based on market conditions and how well your business operates during this time. Make sure your business operates better than it ever has. Likewise, if your valuation has accounted for market conditions, and it is fair and pragmatic, you should know what your bottom line is and when you should exit the deal.

Find a deal structure that works for you

Your deal structure will be shaped by the seller and buyer’s objectives. To find a deal structure that suits both parties, it is imperative to be clear about expectations, financing options, terms and conditions, agreements and warranties, and post-sale terms.

Will the buyer be purchasing the entire company, its assets, stocks, or will you be merging? These circumstances will define your deal structure and what the responsibilities for both parties will be.

The Buyer

Business transactions always require two sides, and the processes will be different for each side (although there may be similarities from time to time).

As a buyer, you’ll assume a lot of risk purchasing a business, so your advisors should clearly communicate these risks and financial obligations to you before you pursue the transaction. Likewise, delegating time to understand the transaction yourself will be advantageous. If you demonstrate that you are serious about conducting a professional negotiation, and that you have done your research on both the risks and benefits, your negotiation can run smoothly.

Of course, the negotiation will be structure according to your goals and objective, and what part of the target you are acquiring. For example, negotiations for an asset purchase will look different to negotiations for a merger.

Research and preparation are the key to success

Favorable deal terms can only be achieved if you conduct ample research and preparation. Not only should you conduct research on the business you are acquiring, but you should also familiarize yourself with its industry, the complexities of purchasing a company, valuing a business pragmatically, and legal and financial obligations.

When it comes to valuing the business, ensure that the value is based on trustworthy methodologies and accurate industry research. While you do want to purchase the company for the lowest price possible, you do not want to offend the seller by undervaluing the business.

Part of your preparation also requires an understanding of your financial situation. Buying a business is not cheap, and it is rare for an acquirer to have all the cash on hand. How will you finance the purchase? You could consider a down payment, loan agreements, investments, or seller financing.

Maintain a professional partnership

Negotiations can be arduous and lengthy, so they require patience. Both the seller and buyer are responsible for holding professional negotiations backed by research, clear objectives, and action plans. It is rare for a seller to accept the buyer’s first offer, so ensure there is room to ‘mold’ this offer into a deal that suits both the buyer and seller.

If you refuse to understand the seller’s perspective, and only go into the negotiations with the intention of getting what you want, you may scare off the seller. Always manage your expectations and be aware that the seller is likely letting go of something they’ve spent years building. Showing respect can build a stable foundation for the negotiations.

In the same breath, a buyer assumes more risk when purchasing a business, so the seller and their advisors should reciprocate this respect. Compromise is an integral part of negotiating, but so is standing firm against your proposals and deal terms (provided they are fair and realistic). Emotions are natural, so do not overlook them. Plan how you will manage emotions like anger, disappointment, or frustration.

Due diligence: be intricate

Due diligence is probably the most important step for a buyer. This is an opportunity for your advisors to investigate the business in detail, identifying risks and opportunities, both in the present and in the future.

Once you have agreed on a price and deal terms with the seller, you’ll begin due diligence. This can take between a month or two, depending on how organized the seller is. Your financial advisor will be heavily involved in this process, and will investigate financial records, projections, tax returns and other documentation to ensure that the target is worth the proposed purchase price.

Through due diligence, your financial advisors can identify risks related to multiple variables, including tax liabilities, poor profit margins, outdated equipment, high employee turnovers, or unreliable customers. Likewise, your legal team can also uncover issues of litigation, contracts related to employees and clients, licenses and permits, and IP (intellectual property) issues.

The deal structure should reflect your objectives

As mentioned in the seller section, the deal structure will be defined by the type of buyer you are, what your objectives for the acquisition are, and how the business will operate post-sale.

Buyers can decide to acquire the assets or shares of a business or decide to merge with the target. A significant consideration when determining your deal structure is the amount of risk a buyer is comfortable with. The main deal structures mentioned above all have risks, so buyers need to discuss these risks with sellers, and attempt to limit them as much as possible.

Considering Documents and Contracts

There will be multiple legal and financial documentation that both the buyer and seller will need to issue, discuss, and sign. Your advisors should clarify any intricacies in the documentation. Below is a list of common documentation you’ll need to consider when negotiating a business.

A contract with your advisor

Negotiating a business on your own (without experience or knowledge) is not recommended. You should hire a team that consists of M&A advisors, an accountant or an intermediary that specializes in selling or buying a business. The first contract a buyer and seller will sign is an agreement with an advisor, setting out their services and fee structure.

Confidentiality agreement

The purpose of this document is to protect units of a business that is for sale, including financial and intellectual property. When potential buyers show interest in a target, they’ll need specific information revealed to them to make an informed decision. If they don’t pursue the sale, they business owner will want the information to remain confidential.

If the buyer reveals this information to someone, the owner can sue them for compensation.

Sales memorandum

Once the confidentiality agreement is signed, a seller’s legal team will draft and issue a sales memorandum. This document is not legally binding, and it will include the sector of the business, the age of the business, financial details, location and premises details, and the structure of the sale.

Heads of Terms

This is a legal document that will be signed to manage the discussions. The key terms of the deal will be outlined to set the stage for negotiations, including a timeline for entering into a formal agreement. Both the seller and buyer will negotiate these terms before a legally binding agreement is formed.

Other documents

Other final documentation can include:

• A sale agreement
• Tax deeds
• Indemnity agreements
• Transfer documents
• Post-sale terms
• Warranties
• Seller protection against warranties
• Non-compete agreements

Strategies for Negotiating a Business

Prepare and research

Every piece of advice you read on negotiating will exemplify the need for preparation and research. This preparation can be as simple as practicing your bargaining skills in a local store, to researching your industry, understanding strategies for both buyers and sellers, knowing your financial limitations, familiarizing yourself with similar deal structures, and social profile checks. The more prepared you are, the more chance you have of achieving a favorable deal.

Assess your market

Following on from researching your industry, it is crucial to understand how the business’s industry fluctuates. This type of knowledge can be used as a tactic to drive down the value of a business, if, for example, a seller has not included it in their valuation. Justifying your deal terms based on extensive, accurate market research is a useful negotiation strategy.

Keep track of your meetings

While it may seem obvious to keep track of such a significant transaction, sellers and buyers should ensure that every meeting, email, agreement, and term is organized, documented, and stored for safe keeping, and ease of access.

Disorganization can stall the negotiation, so ensure that your advisory team stays up to date with everything.

If the deal becomes stagnant, know when to walk away

Negotiations require a significant amount of energy and patience, and things can become stale if both parties are butting heads on certain terms. Sometimes, agreements can collapse. If you experience this, consider a BATNA (Best Alternative to a Negotiated Agreement). Weigh up the most suitable, alternative option to the initial proposed agreement, and determine how they measure against one another. If your BATNA is not sufficient, this may be a sign to walk away from the deal.

While these are only a few strategies to implement in negotiations, you should take time to explore a few more options. You’ll need to evaluate which strategies work with the type of deal structure you have.

Examples of Sector-specific Business Negotiations

Manufacturing Business

• First and foremost, you’ll need to generate a pragmatic valuation of the manufacturing company. This type of business includes multiple assets, so the valuation will need to be thorough.
• The seller’s advisors will screen potential purchasers and contact them
• Both parties will present deal terms and a value of the business, which will likely change
• The buyer and their advisory team will visit the manufacturing plant for an assessment
• Letter of intent (LOI) is submitted
• Due diligence will be carried out
• Purchase and Sale Agreement (PSA) will commence
• Closing deals and transition

Retail Business (lease focused)

When negotiating a retail business, the main value indicators will be its location and lease agreement.

• Your advisory team should have expertise in the retail sector
• Have a counteroffer to the landlord’s rent agreement
• Ensure that you assess the location yourself, identifying its square footage and average prices (these can often be inflated depending on where the premises is located)
• If you can, negotiate a minimum lease length, including benefits like free parking, or a rent-free period when you can make alterations
• Negotiate any penalty fees (early termination, or failure to pay rent on time)
• Consider clauses that will protect you

Summary

Negotiating a business is a complex process with multiple considerations. While it can be tiring, being meticulous and taking this journey step-by-step will benefit you. The most important thing to remember is to conduct granular research in advance, and to be strategic in your tactics and clear in your expectations. Seeking support and advise from entities that specialize in industry-specific acquisitions is highly recommended, considering the legal and financial nature of buying or selling a business.

The negotiation process is not always clear-cut – you may experience unforeseen problems, deal fatigue, conflict, and frustration. While this is common, there are steps you can take to mitigate unwanted circumstances. For further support and advice, you can contact us.

Now, go and achieve your goals!