For those thinking about buying a business, the current economic situation represents a major opportunity. Business owners face various challenges, not least the growing concerns around consumer confidence due to cost-push inflation and the developing cost of living crisis.
In this business environment, buyers should consider Warren Buffet’s famous line; “be fearful when others are greedy, and greedy when others are fearful.” To put it plainly, the current economic situation increases the likelihood of motivated sellers.
This article builds on our guide to negotiating a business in the UK, by giving 5 negotiation tips to consider when buying a business.
1. Begin With Extensive Research
All successful negotiations are built on a few fundamental practices; research is one of them.
Understanding the seller’s objectives is key to the buyer’s research. A good place to focus your initial research is on market trends for your chosen industry. Study trade publications and consult industry insiders via networking events, trade shows or by signing up to thought leadership events like webinars.
Extensive research helps you formulate the questions that guide the negotiations, especially around the value of a business.
2. Build a Professional Advisory Team
Buying a business comes with major financial and legal implications. As a buyer, it’s crucial that you build a professional advisory team before entering into any negotiations.
Your advisory team lays the groundwork for effective negotiations. For example, a financial advisor gives you a clear understanding of your financial circumstances and a realistic position from which to make your best offer.
Contracting a legal advisor that specialises in a particular area, such as franchise deals or retail mergers and acquisitions makes good sense. Their experience is essential to identifying potential risks whilst advising on your negotiation strategy and tactics.
3. Look for Motivated Sellers
Motivated sellers are aiming to close a deal quickly and may be open to making concessions, particularly around their asking price. Savvy buyers understand that motivated sellers offer the highest likelihood of a successful negotiation.
Identifying a motivated seller isn’t a straightforward task as most sellers aren’t open about their desire to get a deal done quickly. There are ways of picking up on certain signals. The first step is assessing the wording of the seller’s advert for anything that indicates urgency or flexibility. Another option is reaching out to the seller or their broker to, diplomatically, enquire about why the business is up for sale.
4. Conduct Due Diligence
As with the above point on identifying motivated sellers, due diligence relates to conducting extensive research. A large part of your professional advisory team’s time should be spent on assisting you with due diligence. DD involves investigating the legal, financial, and commercial position of the business you’re looking to buy.
With the help of your advisory team, look into:
- Permits and licenses;
- Health and safety practices, adherence to government regulations and industry conditions.
- Financial records (balance sheets, cash-flows, income tax returns, annual reports);
- Insurance contracts and lease agreements;
- Inventory of assets, including premises, equipment, machinery & IP (quantity and value, depreciation).
- Current owner’s relationship with clients, vendors, and business partners;
- Potential threats, future profitability, and survivability.
A good due diligence process involves learning as much as possible to uncover potential issues. The goal is to reduce information asymmetries before entering into advanced negotiations.
5. Build Trust From the First Interaction
Effective negotiations arise when relationships are based on mutual benefit and respect. Trust is built through acting in a professional manner from the first interaction.
Try to remain open and straightforward in your communications by remembering that negotiating a business isn’t about one party ‘winning’ – a successful negotiation is one that reaches a mutually satisfactory outcome.
Following up on in-person meetings to clarify talking points reduces instances of misunderstandings and keeps negotiations on track. Making concessions is one of the most challenging aspects of negotiating a business. Be sure to base any concessions on reciprocity and avoid agreeing to something or making a commitment without having a full understanding of the implications.
Honest responses such as: ‘Let me get back to you on that in writing’ or ‘I can’t give an answer on that now, can we discuss that point at a later date are always better than dishonest commitments or reneging on an agreement.
Negotiating is a complex process. Although it can be tempting to jump into negotiations quickly, especially if you suspect that you’ve connected with a motivated seller, patience is key.
In challenging economic conditions, motivated sellers are likely to be open to concessions. All successful negotiations rely on extensive research. When it comes to buying a business, take all the time you need to explore your options and fully prepare for the negotiation phase.