If you’re thinking about purchasing a business, the current economic climate is a great chance. Business owners face numerous issues, not to mention the rising concerns over the confidence of consumers due to the inflation in the cost of living and the escalating cost-of-living issues.
In this current economic climate, buyers must take note of the famous Warren Buffett quote: “Be fearful when others are greedy, and greedy when others are fearful.” To be clear, the current economic environment makes it more likely for motivated sellers.
This article is a follow-up to our guide on the negotiation of the purchase of a business within the UK by providing 5 suggestions for negotiation when buying a company.
Table of Contents
1. Begin With Extensive Research
Every successful negotiation is based on a set of fundamental principles, and research is just one of them.
Understanding the buyer’s goals is essential to the buyer’s research. The best place to begin your first research efforts is trends in the market for the industry you are interested in. Read trade publications and talk to industry experts through social events and trade fairs, or by joining conferences that focus on thought leadership, such as webinars.
A lot of research can help you come up with the issues that will guide discussions, particularly regarding the value of a company.
2. Build a Professional Advisory Team
The purchase of a business has significant legal and financial consequences. For buyers it is essential to establish a reputable advisory group before you begin any negotiation.
Your advisory team will lay the foundations for a successful negotiation. For instance an advisor to financials provides you with a thorough picture of your financial situation and an accurate position that you can use to create your most attractive offer.
A legal advisor who has a specialization in one particular field, like retail mergers and acquisitions, is sensible. Their expertise is crucial in identifying risks and providing advice on the best strategy for negotiation and strategies.
3. Look for Motivated Sellers
Motivated sellers aim to close the deal fast and might be willing to concessions, especially in relation to the asking price. Buyers who are aware of the value of motivation know that sellers have the best chance of an effective negotiation.
It’s not an easy job since the majority of sellers don’t talk in their desires to have the deal completed quickly. There are ways to pick the indicators. The first step is to examine the words used in the advertisement of the seller to identify any indication of an urgency or a willingness to compromise. Another option is to reach directly to the broker or seller to inquire diplomatically whether the business is being offered for sale.
4. Conduct Due Diligence
In the same way as the previous section on finding the sellers who are motivated, due diligence is related to conducting thorough investigation. A significant portion of your advisor’s time should be dedicated to helping you complete due diligence. DD is the process of analyzing whether there is a legal and financial and commercial situation of the company you’re trying to purchase.
With the assistance of your advisory team take a look at:
- Legal
- Licenses and permits;
- Safety and health practices and compliance with government regulations and the requirements of the industry.
- Financial
- Records of financials (balance sheets, cash flows taxes, balance sheets, annually-reported reports);
- Lease and insurance contracts;
- The inventory of the assets such as premises, equipment, and IP (quantity and value as well as depreciation).
- Commercial
- The current owner’s relationships with customers, vendors and business partners;
- Future risks, potential threats and survival.
A thorough due diligence procedure requires you to learn as much as possible in order to discover any potential problems. The objective is to eliminate the amount of information that is dispersed prior to engaging in advanced discussions.
5. Build Trust From the First Interaction
Effective negotiations occur when relationships are built on mutual benefit and respect. It is possible to build trust by acting professionally beginning with the first meeting.
Keep your communication honest and direct in your communication by recognizing that negotiations in business aren’t about a single party winning the other. Rather, an effective negotiation will result in an agreement that is mutually beneficial.
Meetings in person to clarify points of discussion reduces chances of miscommunications and helps keep discussions on the right course. Making concessions is among the most difficult aspects of negotiation in the terms of a commercial deal. Make sure that you base any concessions on reciprocity. Also, refrain from signing something or committing to something without a complete knowledge of the consequences.
Honest responses like “I’ll be back to you with a written response ‘I’m unable to provide an answer to that today, but we can discuss the issue in the future?’ is always better than shady commitments or breaking an agreement.
Final Points
Negotiating can be a complicated procedure. While it’s tempting to start discussions quickly, especially when you think you’ve gotten a motivated buyer, patience will be essential.
In times of economic uncertainty motivated sellers are more likely to be willing to accept concessions. Any successful negotiation relies on an extensive amount of study. When you are purchasing a company ensure you spend time to consider the options available and prepare for negotiations.
