Business owners may soon have a bit more leverage when negotiating the sales of their companies. How not to blow it.
Every 90 days we analyze data gathered from The Sellability Score, a self-assessment questionnaire business owners can use to understand how to increase the value of their company.
This week we released our statistics for the quarter ending March 31, 2013. For business owners, the numbers look good. Last quarter, 11.8 percent of the entrepreneurs who got their Sellability Score received an offer to buy their company. That’s up from 10.7 percent in the last quarter of 2012.
A 10 percent increase may not seem noteworthy, until you realize that the proportion of owners getting offers moves in lockstep with the prices being paid for those businesses. So the value of the offers those entrepreneurs are getting is rising, too. On average, offers made in most recent quarter were valued at 3.6 times a company’s pre-tax profit, up from 3.2 times pre-tax profit in the last quarter of 2012.
Between 2008 and 2012, the market for sales of businesses has been slow, and the value of companies has dropped accordingly. But if the latest numbers herald a trend, we could be heading back into a seller’s market.
When the power is in your hands, you get to dictate the terms. Here are six ways to protect your leverage in a negotiation to sell your company:
1. Never negotiate with yourself
A savvy buyer will ask you how much you want for your business. Never answer, hint or even allude to a number. Doing so would instantly set a ceiling on the value of your company. (Or, if your number is stratospheric, you could scare away a legitimate buyer.) The buyer must always make the first offer. Always.
2. Don’t be someone else’s “prop deal”
Professional acquirers like to avoid bidding for companies against other buyers by trying to get a “proprietary deal.” That’s their way of usurping the traditional sale process. In a proprietary deal, you agree to negotiate with just one buyer.
Proprietary deals are so lucrative for acquirers that they have a nickname for the victims who get wooed into this one-sided arrangement. Unless you like being the butt of people’s jokes, avoid this con. Otherwise, you will unknowingly be committing yourself to a protracted period of due diligence. If you do end up selling your company, it will be for a lower price with less favorable deal terms. When you’re ready to sell, run a professional sale process in which more than one buyer is invited to make an offer.
3. Find a buffer
Quarterbacks, homeowners and recording artists all hire agents because it’s virtually impossible to negotiate objectively when selling a piece of who you are. An intermediary (a mergers and acquisitions professional for companies valued at more than $5 million, or, for smaller companies, a business broker) will run a professional sale process and create competitive tension for your business. Most importantly, when things get heated, they will act as an emotional buffer between you and the buyer.
4. Don’t fall in love with an offer
When you get an offer, the offer letter will look official. Don’t be fooled. There is nothing sure about it. Less than half of the deals that get to this stage ever close. The problem is that the offer will come with an exclusivity clause requiring you to agree in principle to sell your business for the terms set out in the offer, and that you stop negotiating with anyone else while the buyer conducts due diligence. Most buyers will use this leverage to reduce their offer or weaken the terms, meaning the actual offer will often look a lot different than the original.
5. Never let them inside the tent
Some buyers will claim they need to interview all of your employees during due diligence. They may be genuinely interested in getting to know your team, but it’s more likely they are trying to force you to tell your employees that you’re selling the business. Once you do that, you lose negotiating leverage and can be forced to accept the lower offer they make after due diligence. It’s legitimate to have representatives from the buyer meet one or two of the members of your leadership team. There is no justification for allowing them to meet your rank-and-file employees until after the sale is done.
6. The 90-day execution
The biggest rationale buyers use to drop their offer after due diligence is that you missed your numbers for the most recent quarter. Hit your numbers during the due diligence period and you remove an excuse to renegotiate. Consider a one-time bonus for your entire team for hitting a 90-day goal, and tell your spouse to put the family vacation on hold for a few months.
For the last five years, the power has been in the hands of the buyers. That phase may be coming to an end. The time to turn the tables is approaching.
More from Inc.com: