Negotiation should be productive...Give and Take!
Sellers and buyers approach high-stakes negotiations from dramatically different perspectives whether it is concerns about building size and open future productive capacity for growth, or ownership of key operating process patents. There are always differences to be understood and then be resolved to move the negotiation forward.
The seller focuses on "what exactly is being purchased" and the associated "asking price". This "number" represents the sum of all of the financial goals they hope to achieve from the transaction. In the sale of a business, these include financial security, freedom from obligations, reward for a lifetime of work and worry, and possibly bragging rights. The seller requires, in their mind, an "offer they can't refuse" to give up a satisfying career and the power, freedom, status and perquisites of successful business ownership. Business owners earn "psychic income" along with the material kind; they must be compensated to part with it. Buyers cannot usually justify "the number" by only considering cash flow, asset and collateral values. These are buyers' traditional, rational concerns. To often they fail to consider the less tangible ones that may become of increasing importance over time.
In the ideal negotiation approach, the parties defer price discussions until they understand each other's objectives and segment the tangible and intangible assets involved in the prospective transaction. In this scenario, each side learns about the other's goals.
For a business buyer these are:
Why are they selling? What this boils down to is: "Has a motivating event occurred?" It might be a health problem, burnout, a personal situation, or adverse business conditions. If a motivating event has not taken place, the seller may not serious about addressing the buyer's concerns.
What do they hope to accomplish? Understanding the seller their post-sale plans is important. Vague responses ("spend more time with my family, work on my golf game") show that the seller has not thought it through and will probably bring more emotion to the event and less logic. From a recent series of interviews with financial planners, it has become clear that many clients wanting new life situations. These are the business owners asked their advisors "How do I make it happen?" These are the motivated sellers with a goal. To move forward it is usefull to understand what needs must be met to convince them to sell at market price and terms?
When excessive attention is placed on price, it is easy and fatal to overlook other important considerations. Recently I mediated a negotiation that was "stuck on price" according to both sides, whose positions were apparently far apart. I asked the seller about her situation. He was worried about his child, an employee of the company, whose security was in question after the sale and particularly after he was gone. The buyer was unaware of this concern, having spent little time getting acquainted with the seller. I suggested that the buyer offer the child an employment contract and other security as part of the purchase price. When the buyer did so, the seller became flexible and they soon agreed.
Once both sides can answer the key questions, the outlines of an agreement often become visible...and achievable!
It is then appropriate to discuss "the number." A concept that is very useful at this point in a negotiation is to look at the "number" based on "seller's price, buyer's terms." That is, the buyer pays the seller their number, but spreads out payments or structures other terms to reduce cost and risk. This gives the seller their "number" but at a reduced present value. (This may be critical to fill some ego-based need.) Another variation is to establish contingencies under which purchase funds are held back until certain events (e.g., payments of accounts receivable) occur. A third is an "earnout": basing payments on the future performance of the acquired business. These and others techniques can be used to give the seller "the number" on terms acceptable to the buyer.