Tips on negotiating the fairest price when buying a business
Contributor: Wayne Carew, Principal & Senior Advisor with MRSB Mergers & Acquisitions
If you are new to the world of business buying, there are undoubtedly some questions running through your mind. Assuming you have some idea as to the type of business you want to purchase, you might be wondering how you will know whether you are paying the fairest price for your new venture, and how much help you may need in the process. Here are a few questions to ask yourself that should help ensure you will get the fairest deal when it comes time to make or accept an offer.
Has the seller done a complete business valuation?
One challenge that commonly arises during the acquisition process is knowing whether the person you are thinking of buying from has had his or her business valuated by a financial professional. A proper valuation should tell the seller what their business is ‘really’ worth, leaving emotion out of the equation. It’s natural for a long-time owner to assign a number to their business based partially on the years of work they’ve put in to make it successful, but a valuator will look at the nitty gritty, suggesting a price that is fair to both seller and buyer. A mergers & acquisitions professional also understands the difference between selling a business and real estate, where you might initially ask $250,000 on a $200,000 home, hoping for a bigger payout. It’s not as easy for a seller to go back on their first price when selling a business, so the true value should be understood and accepted from the start.
Could you benefit from a vendor take-back?
It might sound like negative terminology, but a vendor take-back can actually benefit you as a buyer. This happens when the seller (vendor) provides the buyer with some of the financing for purchasing the business as part of their equity. This is often required by lenders in order to get approved. Of course, the amount of VTB depends on how motivated the seller is and his or her willingness to continue tying personal capital to the business.
How long do you want the current owner to play a role in the company?
It can often be beneficial to have the selling owner stick around for awhile, providing administrative or operations-related guidance and lending their trusted name to the brand as it undergoes its transition. Part of the price you are being asked to pay will be for what we in the business call ‘intellectual capital’, the knowledge that will be shared by the person or people who have managed the business until now. It is possible to negotiate on this element depending on how quickly you feel you can completely take the reins.
Do you have a full understanding of ‘hidden’ costs?
One of the benefits of eliciting the services of a broker or other buying and selling professional is that they take a fine-toothed comb to the business, uncovering any small expenses that might be affecting its market value. Travel costs, golf club fees and any other non-business expenses will be looked at by your broker and included in the equation that will lead to a fair purchase price for you.
There is obviously more to the process of buying a business than what’s mentioned above; it is an important decision that can set an exciting path for your future if undertaken with the right outlook and preparation. If you have questions around any aspect of buying or selling a business, please get in touch with a member of our Mergers & Acquisitions team.