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Negotiating The Best Price For Your Business In Tough Economic Climates

Garry Stephensen

Article Author: Garry Stephensen
Position: Managing Director
Read time: 5 mins

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The world has suffered a dozen official recessions since the Great Depression of the 1920s. Economic downturns and their associated recoveries are a recurring feature of the economic landscape.  You could almost call them 'a normal part of business'. 

Interestingly, recessions have become shorter and less frequent in recent decades.


Negotiating the Best Price for Your Business in Tough Economic Climates

A review of past recessions from Investopedia


Depressions and recessions are generally preceded by a loosening and then sharp tightening of the monetary supply by the country's central bank.

When it comes to selling your business, the timing of the sale can be a huge factor in the ultimate valuation of your business.  This is especially true in tough economic times.  During recessions or depressions, borrowing power across the economy may be suppressed, limiting what a buyer can afford to pay.  The demand for businesses in declining industries may be lower than boom times.

The same business in during a boom time will often receive a greater sale price than the same business during an economic downturn.  So it's crucial for business owners to be strategic and proactive in timing the sale of their business to maximise it's valuation. 

 

Understand the value of your business

The first step in negotiating the best price for your business is to determine its intrinsic value. There are various methods for valuing and benchmarking a business, including the income approach (based on EBITDA), the asset approach, and the market approach. Ultimately, the value of your business will be based on 3 key factors:   1) its financial performance   2) its future potential earnings  3) FOMO (fear of missing out) that drives a market premium - how many buyers are willing to outbid each other.

Factors to consider when assessing the value of your business include its revenue, profitability, and future growth potential. It is crucial to seek the advice of a professional business broker or financial advisor, who can value your business and provide an accurate assessment of your company's value. 


Read more: The 5 biggest mistakes made when getting a business appraised


Preparing for negotiations

Once you have an idea of what your business is worth, set clear goals for the negotiation process. Consider what you hope to achieve through the sale of your business.  Aside from getting the best sale price for your business, what terms are most important to you?  How long will you remain with the business?  Will you accept a gradual payout over time?  Will your payout be tied to business performance?  Research the market and industry of your potential buyers to understand their motivations for acquiring your business. This can help you tailor your negotiation strategy to better meet their needs.

In addition to setting goals and researching the buyer, it is important to gather supporting documents that can help justify your asking price. This preparation for sale may include gathering financial statements, industry/market analyses, and other relevant information. Consider hiring a lawyer and financial advisor to assist with the negotiation process, as they can provide valuable guidance and support.

Some businesses are bought to achieve strategic goals. Some are bought to achieve financial goals.  Read more: The differences between financial and strategic buyers


As seen in the Financial Review and the Courier Mail.


Negotiating strategies

When it comes to negotiations, it is important to be willing to negotiate.  A seller who is not open to at least some compromise is a "red flag" for any buyer. If the seller is not negotiable before the deal (when everyone is on best behaviour), this does not paint a rosy picture for what post-deal interactions will be like.
However while being lenient, it is also important to stand your ground on key issues, such as the asking price.  Rather than being dogmatic, use current and empirical data as well as supporting documents to justify your asking price. This can help you negotiate from a position of strength - making a strong case for the value of your business.
One negotiating strategy to consider is offering non-financial incentives to sweeten the deal. These might include: 

  • Settlement timeframe to suit the buyer
  • Ongoing training or consulting services
  • Performance based metrics
  • Gradual payout timeframe
  • Guaranteed retention of key persons

Incentives like the above, can be useful in situations where the buyer may be hesitant to pay the full asking price.
Be prepared to walk away from the negotiations if the offer is not to your satisfaction. While it may be tempting to accept a lower sale price in tough economic times, it is important to remember that times change and in just a few years the economic outlook might be different.  With long term thinking like this, know the value of your business and don't sell for less than it is worth.


Closing the deal

Once an agreement has been reached, it is important to review and finalize the terms of the sale.  Ensure that the terms in the written contract explicitly match what was been agreed to in principle.  If any terms are missing or ambiguous, you cannot rely on prior discussions to clarify these points.  
Important terms to double check include the purchase price, incentives, bonuses, timeframes, and the terms of the ownership transfer. Ensure a lawyer or financial advisor reviews the contract to ensure that your interests are protected.
Once the contract has been reviewed and finalized, it is time to close the deal and transfer ownership of the business. This may involve signing legal documents, transferring assets, paying out employee subsidies and completing other necessary steps.

Business Broker - Garry Stephensen

Garry
Managing Director
Business Broker - Karen Dado

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Lloyds Corporate Partner - Mergers & Acquisition Specialist
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Research Director and Business Broker

By assessing the value of your business through an experienced valuer like Lloyds Corporate Business Brokers , by preparing for negotiations, and by using strategies such as offering incentives, you can increase your chances of achieving your goals in the sale of your company. By being proactive and strategic about your timing in the context of the broader global economic situation, you can maximize the financial return on your business and set yourself up for future success.



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