When you’ve found a potential buyer for your business, you need to consider how you’ll handle the negotiations. With so many issues coming under discussion at this stage of the selling process, it’s commonly an intense period for business sellers.
Knowing how to negotiate a business sale – understanding the process and possible outcomes - is key for success. Essentially, it’s a make or break stage, and one that has repercussions for your financial life and general future.
When do negotiations start in a business sale?
Once you’ve issued a Sales Memorandum and then narrowed down interested parties to one or two serious buyers who are in a position to proceed, it’s time to negotiate and start to develop a deal that will work for both parties.
The outcome of these negotiations is then drafted into a Heads of Terms document, which is typically analysed by the buyer’s legal and financial advisers. Once all the terms contained in the document have been accepted/renegotiated where necessary, the buyer due diligence process commences.
Pre-negotiation tactics when selling your business
Before negotiations begin it’s important to decide on various aspects of the sale, including any ‘red lines’ that you’re not prepared to cross - perhaps the length of time you’ll stay on in the business after completion, for example.
You’ll also need to gather together/assimilate information pertaining to the sale, including:
- The other party’s circumstances – their financial and practical situation, and the reasons why they’re interested in your business in particular
- Industry data, such as facts and figures referencing its growth or stability
This type of information, in conjunction with your specific goals and objectives, highlights potential areas for focus during the negotiation stage. Negotiations are multi-faceted when selling a business, and the overall deal will require agreement between parties on a range of figures and terms before the process is complete.
- Previous sales and acquisitions experience
- Sector specialisms and average success rate
- Sales value expectations and growth potential
Different elements of a business sale
Negotiations will involve various aspects of the business, including assets such as buildings and land, vehicles, and plant and machinery, and the basis on which their value has been applied.
Detailed maintenance and service records for hard assets including machinery and vehicles are important for supporting this value, and help to achieve your overall objectives from the sale in monetary terms.
So what aspects might come under discussion during negotiations? Here are just a few areas of focus:
Transfer of staff
Staff contracts may be protected during the transfer from one owner to another under TUPE – the Transfer of Undertakings (Protection of Employment) regulations. It’s a complex piece of legislation, and important to understand the implications of failing to meet the requirements.
Warranties support the claims that you’ve made about your business and protect the buyer from financial loss/loss of business in the future. The information you’ve provided might be difficult for a potential purchaser to substantiate – examples of areas covered by warranties include accounting information, rights to intellectual property, pension arrangements, contracts, and tax issues.
Indemnities cover specific scenarios that could occur in the future, such as the outcome of ongoing litigation between the business and a customer or employee, for example, or legal problems surrounding a product.
Another area for consideration during the negotiation stage is restrictive covenants. The buyer may want to impose a non-compete clause, for example, or a non-soliciting clause, which prevents you from ‘poaching’ customers or staff for a specified period of time if you start a new business.
Professional assistance to represent your business
Placing the sale of your business in the hands of a specialist removes some of the pressure of this important transaction, especially when the time comes to negotiate. It allows you to carry on running your business with minimal distraction, and with greater confidence for a successful sale.
Professional assistance in negotiating with prospective purchasers offers you a degree of separation from the potential new owner, and provides a little distance to consider offers and demands.
Reducing the buyer’s perceived risk from the transaction is crucial when negotiating a business sale. It encourages the highest value to be achieved, but it’s only one piece of a complex jigsaw that, once put together, can make all the hard work of building your business more than worthwhile.