Making an offer
After you've conducted due diligence and valued the business, it's time to begin negotiations—usually with professional support and business advice. Negotiating the purchase of a business involves making an offer, which is usually followed by the seller's counter offer and bargaining to reach an agreement.
- Know your limit (the highest price you're prepared to pay for the business) and stick to it.
- Never agree to the first price quoted. Remember that the seller's first price is a starting point. It's probably useful only because it gives you an idea of whether the business is within your price range.
- Open negotiation at the lowest price possible (but make sure it's reasonable and you're able to substantiate it). If you offer half the asking price, the seller may not think you're a serious buyer.
- Always take your time during negotiation. You're buying a business that may well be your principal activity for many years. An extra few days or weeks are worth investing to ensure you purchase the right business for you.
- Make your own list of items for negotiation, placing them in separate categories based on what you can compromise on (nice to have) and what you can't (must have).
- Challenge the seller by asking 'what if' questions. What if a major client goes bankrupt? What if a key group of employees leaves with the changeover?
- Do not reveal your own reasons for buying or how badly you want the business. If you really want it, you'll probably end up making more concessions to get it or paying more for it anyway.
- Avoid being overly critical and confrontational. Keep the conversation focused on facts.
- Practise the negotiation with a friend or relative beforehand (role play).
- Make sure you're satisfied with the outcome. The product of successful negotiation is both parties satisfied with the end result. But if only one party is satisfied, make sure that party is you.
- Be prepared to strike a deal if you're comfortable with the price. Be prepared to walk away if you're not.
- Above all, keep emotions away from negotiations. If you can't do that, ask your professional adviser to negotiate on your behalf.
Learn more about negotiating successfully.
Buyers and sellers often enter into negotiations from what's sometimes called a 'positional bargaining' standpoint. Since both parties want to achieve the best outcome for themselves, the seller's interests will be different from your interests.
- The seller's interests will include wanting to make as much money as possible on the sale of the business, attending to the sale transaction in the way that's most tax advantageous for them, severing liability ties and avoiding any contract conditions they can't meet. Most of all, the seller wants a profit.
- Your interests will include wanting to pay the least amount possible for the business, with the inclusion of as many tangible and intangible assets as possible in the purchase price, favourable payment terms and warranty protection against false claims from the seller. Most of all, you want a bargain.
A shrewd bargainer would be able to convince the other party that the other party is getting more than they're paying for or, alternatively, that they are paying less than what the business is worth.
Business legal structure
If you're satisfied with the due diligence report, have the necessary finance available and are ready to sign the contract, you must consider how to structure the purchase. The most common structures include:
The structure you choose must be defined by key considerations, including:
- financial risk of the business
- personal financial exposure
- requirements from outside partners or investors
- expansion plans
- federal and state tax efficiency.
It is very important that you decide on the correct legal structure for your business before you sign the contract. Asset transfers attract taxes, such as stamp duties and capital gains.
Make sure you don’t need to re-structure your business soon after you have signed the contract, as this will attract unwanted taxes and additional professional fees. Seek professional advice before deciding on the ideal structure.
Learn more about setting up a legal business.