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Communication, Negotiation and Bargaining in Business

Guest post by: Ian Macleod

Article Overview: Decide on a negotiating style. You may be a competitor, looking only for the best deal; others are compromisers, seeking middle ground; or are you the collaborator, valuing good communication and a fair solution for both parties? Try to asses which style works best for your personality.

Communication, Negotiation and Bargaining in Business

Decide on a negotiating style. You may be a competitor, looking only for the best deal; others are compromisers, seeking middle ground; or are you the collaborator, valuing good communication and a fair solution for both parties? Try to asses which style works best for your personality.

Assessing the buyer

Your best asset in any negotiation is information. Qualify the buyer by asking for a personal financial statement. There’s no point wasting time with a buyer who can’t afford your business.

AT THE TABLE

Momentum

Delays destroy deals. Once a prospective buyer emerges, do everything in your power to keep the deal moving. Set up meetings, provide information, and keep trying to move the buyer forward to an offer. Respond promptly to all buyer requests and proposals. If you drag out the process, the buyer will lose interest and move on.

Goals

Set goals at the start so you and the buyer are aware of what you want to get out the negotiation process. A clear plan on both sides should prevent either party from taking the lead. A good negotiator will always win on the more important issues and let the other party win on the minor ones. You can do this if you keep your goals in mind.

Understanding basic psychology may help during this process. A good tactic for the seller would be to emphasize the growth of the business, and how well the purchaser would fair in the future.

Negotiating structure

The order of negotiation should be: needs, terms, price. Draft a list of your needs in the sale of the business. Do you seek employment after the transfer for yourself or others? A discussion of needs should take place before any talk of terms or price.

Terms drive the deal. Discuss terms before price—they are more important, and will have a tremendous impact on the final price. In the majority of deals, terms decide the deal.

Price and flexibility

Have the buyer make the first offer. You have probably already listed an asking price on your ad, so when the buyer asks “What do you really want for the business?” try not to deviate. You want the buyer himself to make up the ground between his valuation and your own.

Avoid emotions as much as possible. Banging the table and refusing to budge on matters of price are good ways to scare the buyer away. There will always be a set of terms to offset a lower price. Likewise, a higher price may be able to offset less favourable terms. Everything is flexible. Both buyer and seller should know this.

Don’t lose focus!

Nitpicking and getting stuck on tiny details are sure ways to irritate a buyer, increase legal costs and kill the momentum of a deal. Don’t pick dirt with the chickens.

KEY POINTS

Selling Price

While it may sound like a simple number to reach, the selling price may actually be divided into the following pricing sections:

• Equipment, supplies, and inventory
  
  
• Price for buildings and company-owned land
  
  
• Purchase of owners shares of stock, and that of other shareholders
  
  
• Non-compete agreement compensation
  
  

Decide on Contingencies

Conditions which have to occur before the completion of a sale are called contingencies. They might include:

• A good review of the businesses financial records
  
  
• Earnest money or escrow receipt
  
  
• Buyer qualification by their lender
  
  
• Lease transfer for building deemed acceptable
  
  
• Buyer bank financing deemed acceptable
  
  

Consider Covenants (Promises)

Promises made by one party to another are called covenants. They might include:

• Non-competition covenant or non compete agreement.
  
  
• A ‘business as usual’ promise from the new owner. The new owner promises not to distort the business by making unusual agreements, and to provide the customers with the same level of service as that under the previous owner.
  
  

Representations and Warranties

Warranties are reassurances made from one party to the other in a business sale. Including:

• Accuracy and completeness of financial records
  
  
• Accuracy of goods and products inventory
  
  
• Seller possesses full authority in the selling of assets, and is not in default on any contracts
  
  
• Leases are in order, taxes are paid, liabilities are current, and there are no liens (claims) against any assets that have not been disclosed
  
  
• Validity of all permits, licenses and certifications
  
  

Transition Issues

Transition issues include:

• Inventory or customer work that is ‘in-progress’
  
  
• How to deal with ‘hidden’ liabilities showing up after the closing of the sale
  
  
• How customer contact is to be handled, and by whom
  
  
• Employment of current employees
  
  
• Vendor contracts and contact details
  
  

HOW MUCH TO REVEAL, AND WHEN

It’s necessary to disclose everything about your business before receiving or accepting an offer. Let the buyer know there will be time for a books-check (due-diligence) – and that if there are problems they can withdraw. You may hold back on information that would be damaging if disclosed too early (e.g. customer information or key processes) – if the buyer needs to see such information for a valid reason, (for instance, to assess the size of the customer base) you can always change the names on the list.

Negative information should always be cleared before any offer is made. Honesty is crucial in negotiation. Despite the fact that honesty will always be reciprocated, dishonesty strips you of credibility and may compromise the entire sale.

At some point a sale of business purchase agreement will be needed. The buyer’s attorney would usually draft this agreement, which saves the seller legal fees. However, a sale of business kit and contract agreement package is available through our website, which can save a lot of unnecessary legal fees. If you have to negotiate any extra hurdles then these changes can be made in the contract as they arise. This prevents having to pay a solicitor the very costly re-drafting fee.

Next comes the Letter Of Intent (LOI), stating terms and price – the two crucial negotiating points. Make sure you are happy with the terms and price before the LOI is issued. Don’t accept a LOI and assume you will be able to do further negotiating later on.

WHEN TO CALL IT QUITS

Never negotiate with a messenger. In giving all the information to a person who can’t make a final decision, you are relinquishing most of your negotiating strength. The buyer will have the information relayed to him and can pull apart the deal as a whole, rather than point by point, as would happen in a meeting. If you have to meet with a right-hand man early on, be sure to keep some information up your sleeve for later on.

Set a condition on which you will “walk away” from the deal (price and terms). Know when to move on to the next buyer. Don’t waste your time with someone who can’t meet your needs, terms and price.

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