This month, we are feeling inspired to tackle a tricky topic when it comes to the endeavours of selling a business – negotiations.
Over the past ten years, we have been serving business owners who are interested in selling and time-and-time again we see them struggle with valuating their business. There are a number of misconceptions out there around multiples, and oftentimes this can drive their asking price up to unrealistic prices.
The asking price is just one of the components of the offer, but commonly becomes the point of impasse for both the seller and the buyer so we wanted to focus this blog on that topic. First, we need to acknowledge that this is a very tough part of the process emotionally, so understanding your BATNA and why the valuation is where it is is important before you start so that you don’t get too caught up in the negotiations emotionally.
If you dont prepare for the process and you find a potential buyer it could go something like this:
Seller (Business Owner): This is my asking price $DOLLAR AMOUNT
Buyer: OK, I would like to move forward, let’s see the financials
Moves into Due Dilligance
Buyer: Based on what I see here, your business is worth $SIGNIFICANTLY LOWER DOLLAR AMOUNT
Seller: But we are selling it for this $DOLLAR AMOUNT
Buyer: Well I’m no longer interested then
Seller: Why did you waste our time and get our hopes up?
Buyer: Why did you list it for so much more than what it is worth and waste MY time?
And so forth….
Obviously this is an oversimplified rundown, but you get the picture. From here, oftentimes the buyer just walks away. Occasionally things move into a deeper negotiation phase, but if there is a huge disconnect in these perceived costs, that is less likely.
Now, what we often neglect to consider is the emotional aspect of this one important moment in the succession journey. It just doesn’t feel good to have your business, something you have put heart and soul into for so many years, viewed as worth less than you think it is. The harsh reality is that you will likely always think your business is worth more than it is, simply because you have an emotional investment in addition to the logical and financial investments. This is where the ‘emotional readiness to sell’ piece begins to come to life.
This is such a common problem that it inspired us to create a program just to help business owners get ready for this stage (the Formal Succession Planning program), but even the best prepared still struggle unless their heads are in the right space.
What we are here to tell you is that it is normal to have a buyer offer you less than what your asking price is. But how do you know if too low is actually too low? Have you heard the expression ‘failing to plan is planning to fail’? This applies all too well here.
Many business owners feel that a conversation with their accountants is enough to determine their asking price. How much did you make in the past 3-5 years, what are your assets, and bam you have an asking price. Where we really cringe is when a business owner looks at how much money they NEED from the sale to move into their next life phase, and try to weigh that in too heavily on the price as well.
In order to navigate a negotiating situation, a well executed asking price combined with a few other key elements are mandatory. Let’s think of getting ready to sell like baking a cake.
We have a list of ingredients:
- Books in order for due diligence: this is self explanatory and checks off that conversation with the accountant.
- A third party valuation: Having a neutral third party with the appropriate credentials for valuating your business will help you to know what the actual worth is. If you are comparing this to selling a house, this would be the market value of the house.
- A BATNA or Best Alternative To Negotiated Agreement: A thought exercise that gives you a game plan for negotiating, necessary for comfortably working through the various options a buyer might throw your way.
Once you have collected all of the ingredients, you need to mix them together in just the right way. This can be thought of like the negotiating period. Compromises will always be made, but with the right ingredients you are less likely to have to compromise outside of what will yield productive results.
Baking the cake in the oven can be likened to the sale itself and the transition period, and mentorship is the icing on the cake. We will pause here to contemplate the ‘baking process’. Just like with a cake, once you stick it in the oven, the change is irreversible. This is perhaps why this phase becomes unexpectedly scary for the business owner. It is a big deal, and that might catch you by surprise.
What is important to remember is there is a cake to eat on the other side. When that timer goes off, you get to have a slice and move on to the next part of your life. As scary as that might feel, it is truly built into the intent of succession. Without the aforementioned ingredients mixed into the negotiation, the results can be messy and will leave you feeling not so great. When everything is measured out correctly, however, you can move forward with an approach that changes the decision making in negotiating from emotional, to educated.