This is the first is a series of postings on the process of selling your business. As a sole/soul proprietor your business is your life and there comes a time when its time to retire or change your life. The time, money and effort you have put into your business up to this point has been building equity for you. But the only way that you collect on that equity and have it available for the next stage in your life is to sell the business. In this series, HOW TO SELL A BUSINESS, we will introduce you to what you need to know to turn your business into the cash you need to take that next step.
The first thing you need to understand is how to go about pricing your business.
PRICING OBJECTIVES
Objective: Get the best possible price for the business
a. Seller: Highest possible price
b. Buyer: Lowest possible price
The best possible price is situational and contextual -- basically it is the point where the seller and buyer can agree that the price is “fair”. A “fair” price is a price that a seller is willing to sell the business for and a buyer is willing to buy the business for. What is fair in one situation may be seen as unfair in another situation.
HOW DO SELLER AND BUYER REACH AGREEMENT?
1. The process starts with the seller who will quote an “asking price” for the business.
2. The buyer will have already determined if this is the type of business he/she wishes to acquire will make a “offer” which may be higher or lower than the asking price.
3. Seller and Buyer negotiate until a deal is reached on the price; or a decision is made that no deal can be reached.
The process begins with an assumption that neither the buyer nor seller is starting from a fixed position relative to the asking or offering price. The “asking price” represents a starting price that may be higher than the seller’s “minimum” price. On the other hand, the “offering price” represents the buyer’s starting price which is lower than his/her “maximum” price. One might expect for the deal to take place to take place between these extremes. The negotiations then generally begin somewhere between the asking and offering prices. An agreement is very likely to be reached as long as the price does not go below the “absolute minimum of the seller," nor exceed the “absolute maximum of the buyer”.
NEGOTIATIONS PRINCIPLES:
IT IS STRATEGICALLY BEST FOR THE SELLER NOT TO REVEAL ONE’S MINIMUM PRICE BEFORE THE NEGOTIATIONS BEGIN.
GETTING THE BEST PRICE IS A MATTER OF THE NEGOTIATING SKILLS OF THE PARTIES INVOLVED.
FOR THE SELLER WHO IS UNCERTAIN ABOUT HIS/HER NEGOTIATION SKILLS MAY WANT TO ENGAGE A THIRD PARTY TO ACT AS HIS/HER AGENT IN THE NEGOTIATION.
WHAT TO LOOK FOR IN A NEGOTIATOR:
a. Experience business broker or consultant who knows the business and industry
b. Known to the buyer and seller, if not personally, at least by reputation
c. Trusted to be fair by both parties.
d. If an attorney is used by the seller, get one who has prior experience “negotiating” sales or purchase of a business and understands the need to SATISFY both parties. You DO NOT want an attorney who is out to get the most without regard for the interests of the other party, otherwise you may loose the deal. Remember you are trying to get the "best" price and the "best" price is the FAIR price.
SELLER'S STRATEGY
1. The initial asking price should have some rational objective basis -- Investment Value
2. Set up an absolute firm “minimum” price below which there is no deal regardless of the circumstance. This should also be based on some rational objective basis -- Principle of Alternatives.
3. Seller should develop an understanding of the buyers’ point of view relative to the value of the deal. What is the buyer “really” looking for in the deal, and what is it worth to him? The buyer may be looking at the business in a totally different light than the seller and valuing the deal based on that.
We will be discussing these points in future postings, stay tuned.
