Q & A Table of Contents
Getting Past An Impasse Valuing A Business
From: Angernie, Gold Coast
Question: When negotiating price and terms of repayment when buying and selling a business, what techniques can be used to resolve an impasse? Are there any bargaining strategies that are innovative rather than the traditional strategies? Please advise.
Response: Determining the value when a business is being sold can be easy or difficult. If there are many such businesses for sale in your region, it is possible to look at comparisons. However, if there are not many similar sales, you need to take a different approach.
One possibility is to ask an outside party who is known to be honest and knowledgeable to provide an independent valuation. If you use one person, the buyer and the seller of the business should pay equal shares of the valuation or appraisal fee.
Sometimes buyers and sellers each want to depend on their own 'experts'. In that case it probably makes sense to have the buyer's and seller's experts choose a third expert, submitting their information to him or her for a response.
When the business to be sold has a relationship with a bank -- or when the buyer plans to borrow money from a bank a) to purchase the business and/or b) for operating funds -- it may be that the bank(s) can offer their sense of the value of the business.
In many situations, however, there may not be justification for outside experts or banks may not be involved; it is simply a matter of the buyer and seller reaching agreement by themselves. Those cases, which are probably in the majority, require giving careful consideration to the interests and limits faced by each party.
The seller may use a variety of techniques to determine the business's value: how much annual revenue does it yield -- and what is the resulting profit? How much has been invested in the business? Does the business have a particular advantage in its market that makes it especially valuable? Why is the business for sale: retirement, using the profit to start a new business, a partnership break-up?
Buyers need to use their own means for establishing value: How much profit do they think the business can make under their management? How much money do they have available -- or will they need -- for the investment (purchase plus changes/improvements)? Do they have any unique personal reasons for wanting to buy this particular business?
It can often make sense to utilize a deadline for reaching agreement. A deadline should not be a threat, but rather something like, "If you'll agree on a price of X by next Tuesday, I will be prepared to go forward. If we haven't agreed by Tuesday, my offering price (if I am the buyer) may go down -- or -- my sales price (if I am the seller) may increase." In the meantime, each party should see if there are alternatives; other buyers or sellers available.
The ultimate job of the negotiators is to ask each other questions and listen very carefully to see what issues are most likely to be convincing to the other party. One issue needs to be handled quite directly: "We have both expressed an interest in transferring ownership of this business. If we have this common interest, how would you suggest we overcome our differences in order to achieve the commonly-desired end result?" Focusing on that joint or common interest may help break the impasse.
Good luck,
Steve
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