I deal with hundreds of buyers of businesses. It’s a part of what I do. The more buyers I deal with, the better chance my seller clients have of getting a good price.
A business buyer has it relatively easy: He has the funds he knows about (cash), and the access to funds he knows he can get (having spoken to banks). He investigates a number of businesses and eventually chooses the one which suits him best. It is not uncommon for a business buyer to be concurrently dealing with three or four business brokers or owners. It is the easiest thing in the world for him to simply walk away from a deal, even if he doesn’t know everything about the target business; it is a simple process of elimination, and that elimination often happens prematurely.
First he discounts the least attractive, be it by price or industry or location or customer or supplier or a personality clash with the seller, or simply because he struggles too much to get the information he wants. Then he starts to look at what’s left on his list, and starts his negotiation. It is likely that at this point he will pick out one particular favourite, and negotiate in earnest with that seller. If it doesn’t work out, he moves on to the other sellers, and the others who have entered the market in the meantime. Most of the time he does not even bother to let the unsuccessful sellers know that he is no longer in the game.
What of the seller? Well the seller generally only has one business – the one he is trying to sell. There simply isn’t a lot of option available there. There are some micro options, if you like: Price, terms of payment, hand over period and restraint. Obviously the most important of these is the price, and yet it is often the last element which is negotiated because the seller works off the wrong base to start with.
“Let us do a due dilligence so we can pay you a fair price”, says the buyer. Hopeless, I say. What if the buyer wades through all your secret information “in good faith”, and then offers you way below what you believe the business is worth? What do you do then? Of course you’ll argue, but to what end? The buyer knows that you have given him everything he needs to go into competition with you, and he knows you know that. Hardly a fair negotiation for the seller.
Responsible business owners know all the time what their businesses are worth. Why? Well, simply
- because they do not know when someone will walk through the door and suggest he is interested in buying the business
- because we should all know what our wealth score is, and a business is part of that count
- because an early warning of a lack of value is more valuable to anyone’s exit plan than many other things
- because our new tool allows you to build your business up to your target value in bite size, manageable chunks
Or more likely, if your business is worth less than what you need to move on to the next phase of your life, at least you can do something about it now, and not when it is too late. Sometimes living a happier life is less about chasing that extra sale, kissing that dislikeable customer’s own exit system, and more about gross margin, net margin, creditor days, debtor days, inventory turnover and finding a way of financing all this wonderful extra value without destroying your business in the process!
Buyers can hop from one offering to another in their quest. Sellers generally only have one business. Sellers are easy to find. Good quality buyers are not. Don’t stuff up the opportunity.