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Posted: 2010-02-05 / Author: Bob Power Don’t Get Run Over At The Negotiating TableIn the first article on “Don’t go into business wearing rose tinted spectacles” I stressed that negotiating skills are critical when wishing to start up, buy or sell a small businesses. Since then I have been appraised of three similar case studies, which have a direct bearing on the necessity of being able to negotiate to your best advantage. If you don’t get it right you pay too much and inherit many liabilities you don’t need, and you can be bulldozed into accepting things that you had no intention of conceding, you may not even know at the time that you are conceding them.Noting always that what the seller wants, the buyer wants the opposite, the three cases resulted from the auditors of each selling company independently valuing each business at R1m. Case A- The seller wanted R1m because he stated that it must be the correct price because his auditor had proposed it. NB. Valuation does not equal price. The figure given by auditors is for guidance only. In all my experience I have rarely been involved in buying or selling a business at the figure placed on the table by the auditor. In this case the buyer agreed to pay the full R1m, upfront without questioning it and only performing a limited due diligence. NB It is advisable as a buyer to pay the price by say three equal installments over one year, with the seller staying for a reasonable period of time for the handover. Interest may have to be paid but let the seller ask for it. In this case when the wheels were falling off the business, the seller could not be found (he had his money and was gone). The business went bust after 6 months of takeover. Case B- In this case the buyer was a better negotiator. When advised of the price (seller kept to R1m) he said that it was far too high and that he wanted to carry out an extensive due diligence, which he did. As a consequence he found many problems (skeletons in the cupboard) and then started to negotiate the price down. He started low, knowing that the seller would keep high. His first offer was at R600,000. The seller came down to R800,000. The buyer went to R700,000. They met half way at R750,000, conditionally upon the seller staying for a reasonable period for the transition and that payment would be made in three equal tranchees-on signing, after 6 months and after one year. No salary was to be paid to the seller and no interest on the outstanding balance-NB. If the seller’s lowest price is close to the buyer’s highest price there is a good chance of a successful deal. Case C- Turning back to the seller’s position, when advised that the price suggested by the auditor was R1m, he opened at R1,3m. The buyer started at R900,000. Eventually a deal was struck at R1,1m provided that the seller be paid a reasonable salary, during the agreed handover period, payment being made in two tranchees -30% on signing and 70% six months later, and interest paid on the outstanding balance. Lessons learned are that sellers should always start high against the buyer starting low, then the better negotiator wins. There are always many other permutations which arise. If the buyer pays too much for the business his chances of survival are remote. Other aspects which come into play are: The seller will want to limit warranties and indemnities he has to give in the sale agreement. He wants to exit with little risks as possible, the buyer wants the opposite. The buyer wants to buy the business out of the selling company as a going concern, not taking the skeletons in the cupboard. The seller’s shareholders want to sell their shares so that the buyer takes over the selling company, warts and all. Both these aspects are very much part of the negotiation skills of the parties. Other points to note: Whatever you have agreed must be correctly recorded in the sale agreement.Don’t rely on the other party’s lawyers agreement, get your own lawyer.Timing-don’t be put in a corner and under pressure.Don’t make an agreement over the telephone.After each meeting record what has been agreed and signed off by the other party at the next meeting.Always have a witness present.Be a good listener.Express yourself clearly-in writing and verbally.Stay in the match, don’t close the door.Don’t agree piecemeal, discuss every issue first, then go back to the matters outstandingWalk away if you are not happy.Know your shortcomings and utilise your strengths.Recap often and always know when to caucus.Do your homework and know your facts.Don’t be afraid to say NO and ask WHY-negotiate from strength. Bob Power www.powercorporateconsultants.co.za Top of page | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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