Business owners are emotionally and materially vested in their companies.
They have to be . . . If they aren't 100% committed, their business has little chance of moving beyond the startup phase. But when it's time to sell the business, owner attachment can become a problem, especially when it comes to the issue of negotiating a sales price.
Owners are often reticent to negotiate on the asking price for their business. And when they do negotiate, the process can be filled with so much emotion that it creates a highly adversarial relationship with the buyer. Is it realistic to refuse to negotiate on price when you sell your business?
The short answer is no – price negotiation is an expected and appropriate part of every business sale. But sellers can minimize the amount of tension they experience by understanding the basics of business-for-sale price negotiations and considering the alternatives to accepting a lower asking price.
- Valuation. Asking price should always be based on an objective valuation process that has been commissioned from a professional business appraiser. As the seller, the amount you think your company is worth is probably inflated by the amount of blood, sweat, and tears you've invested over the years. A professional appraisal puts the asking price more in line with market realities.
- Negotiation range. You have to be willing to negotiate on price. But you also have to know how much you're willing to negotiate before you engage with a buyer. The buyer will make an offer that is lower than the asking process – but if he offers 50% of the asking price, he is out of line. Most sellers set an asking price that leaves room for no more than a 20% lower final price.
- Financing terms. Financing terms have a direct impact on sales price. If the buyer persuades you to finance part of the purchase price, you can be more rigid when it comes to negotiating price. Don't settle for both owner financing and a low purchase price unless you have a valid reason to sell quickly.
- Owner concessions. In addition to financing, other owner concessions also influence the sales price. For example, if you want to require the owner to keep you on as an employee for a specified period of time, you should be willing to accept a slightly lower sales price. Just make sure the lower price makes financial sense compared to the benefit you receive from the concession.
- Capital assets. Another way to accept a lower asking price is to exclude certain assets from the transaction. For example, if the buyer currently owns a similar business, he may be planning to bring his own equipment with him when assumes ownership of the company. Since he doesn't need your equipment, you could sell your assets and accept a slightly lower asking price, taking into account the time and energy it will take to liquidate your capital assets.