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When Buying a Business, it has to be a Win-Win Situation
Whenever an offer is made, the Buyer obviously has to get the best deal possible for him/herself, both in Price and Terms. The Seller needs to logically do the same, from his/her perspective. There is always a balancing act between those issues.
Buyer and Seller both have a need to feel like they “won” something. The Buyer will naturally feel that he/she paid too much in some cases, and the Seller will feel that he/she gave away too much. If both feel that way, it may be said that the deal was rather fair, if you think about it.
Many times, Buyers will not look at the motivation of the Seller and the practical issues surrounding his/her position, in making offers that are viewed by a Seller as being unrealistic. These can kill not only the deal, but any chance of performing a negotiation that does not cause antagonism between the parties. The net result is that such attitudes will keep both sides from being creative with their thinking, and precluding them from obtaining mutually beneficial terms.
The key is for both sides to be REASONABLE! The Seller has to be reasonable with his/her pricing and expectations; the Buyer has to be reasonable with the Terms and Price he/she offers.
What is reasonable? It varies from deal-to-deal, and a good Broker will help in making that clear. A bad Broker will simply make a difficult situation worse.
As an example, we are dealing right now with a very viable business – one that has a strong history of growth, no imminent impediment to future growth, excellent financial records to take to the SBA and no real reason for the Partner-Owners to sell, except that they differ in the direction the business must take to accommodate future growth. They have decided to part, selling after doubling the business’ size in the four years they have owned it. So, there is no divorce, no terminal illness, no one is so angry that they cannot wait for the right deal. All of this has been explained to the Buyer.
The Buyer is terrifically experienced, has great potential to grow the business further and can qualify for an SBA loan; however, he is in a slightly difficult cash position. Through his offer, the Buyer has stated that he wants the Seller to allow him to come in with almost nothing in the way of a deposit, (with more at contract signing,) he wants the Seller to take a large second position note to allow him to conserve his limited cash, and on top of that, he is offering 30% below the asking Price.
It ain’t gonna happen!
There is nothing in this deal to allow the Seller to feel secure about this Buyer’s ability to operate successfully, because of his poor cash position; there is nothing to make the Seller to feel warm and fuzzy about the price; the Seller is taking a risk by taking part in the financing by taking a note; and if the Buyer should fail through no fault of the Seller, the fact that the Seller’s note is in a second position means that he will, in all probability, simply lose any hope of getting any part of that note back, through legal action. In essence, all the Seller would be getting for certain is about 50% of his asking price, with the recovery of remainder perceived as being highly questionable. There is no semblance of a “win” for the Seller; any “win” is solely on the side of the Buyer.
Some Buyers appear to have this attitude that the World owes them; that they have some sort of God-given right to purchase a business, and the Seller should do anything and everything in their power to accommodate that acquisition. This is not a reasonable position!
And some Sellers believe their businesses should bring in prices that are far above any price that can be qualitatively and quantitatively supported. One of the statements we hear, when we suggest that the price is too high, is something like: “Yes, I know the price would normally be $X, but if the Buyer does this, than and the other thing, the business can double with the foundation I have laid!”
Our answer is: “Then YOU do those things! And when you accomplish them and the Revenue/Profits grow as a result, then call us to list your business!”
Sellers, you cannot expect the average Buyer to pay a premium for your business, for the privilege of expanding the business through his/her own efforts. The Seller is getting paid on the basis of the good will and infrastructure he/she has generated, normally as expressed as a function of Adjusted Cash Flow; the Buyer increases the value of that same business through his/her own work ethic and the investment he/she makes in the further expansion of the business. The Buyer should not be asked for making the business grow, through his/her own activities.
If either party comes into the negotiation with unrealistic attitudes or expectations, both will be sadly disappointed at the result.
(Receive in-depth, personal consulting online, with The BAF Group’s principal at https://clarity.fm/donaldbarrick .
The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Thank you for your interest.)