In life, you very rarely get what you deserve. The same goes for business: you invariably get only what you negotiate, and this is absolutely true when it comes to selling your business. To achieve a successful outcome in any negotiation, you have to have options — alternative offers and buyers that allow you to best position your business for sale. In order to do this, you have to prepare well, and prepare early.

Yes, a proper valuation will tell you what you can expect. Yes, the prospective buyer will look at every aspect of your company and decide what is a fair return on investment for him or her. But, at the end of the day, the price at which you will sell your business will come down to negotiation.

Alternatives

The most crucial factor for the outcome of a negotiation is alternatives. What alternatives you have and what alternatives the other side has. Think about it. Let’s say you have been fortunate enough to be in a sector where consolidation is taking place and the big guys are fighting for market share. A seller’s dream.

Strategic buyers abound, eager to outbid each other and thus most likely to pay premium valuations. Sounds great. And to make it even better, one of them has approached you. Looks certain that you are going to get your proverbial million dollars.

But Are You?

How many buyers are there in your sector? A few. How many sellers? A lot. Who has more alternatives in the negotiation? The buyer. Oops, the million dollars is getting elusive.

Every time the buyer has more options than you do, your negotiating position is weaker. If you want to get the best price for your business you have to balance the table.

Preparation

How can you do that? Well, in one word: preparation. The decision to sell a business is first and foremost a personal decision. If you are in a situation where selling your business is even a distant possibility, you should seriously prepare for it and treat it as a very important project that needs to be completed. Otherwise, when someone knocks on your door, you are already under pressure.

However, many business owners are unprepared for that initial bid. So let’s see what you can do if you aren’t fully ready.

First thing is to counter the pressure: listen carefully to the unsolicited offer and refer the buyer to your M&A broker or intermediary. If you do not have one, you should quickly retain one. The presence of an advisor signals to the buyer that a) you know what you are doing and b) you are talking to other buyers, too.

Hire your advisor immediately and hand him the list of all potential buyers, including the one who has approached you. Do not wait until you have secured an offer from the first buyer to hire an advisor to find you “a better deal”. You would be putting the advisor in an untenable situation: essentially you’re asking him to drop everything else — since time is ticking — to try to find alternatives for a business he does not know well and to risk not being paid since your buyer can always match the “better deal” that the M&A advisor has produced.

You will be given a tight deadline by the buyer. Reject it. Even in fast-paced North America, a seller cannot realistically be expected to decide on an unsolicited offer within a weekend. For starters, you are unprepared; but most importantly, they have approached you. They should be the ones making the first move. So make sure that you say absolutely nothing concerning price and terms.

Follow Through

Now that you have hired your advisor, help him draft a list of 5-10 alternative potential buyers. Remember, he does not have the time to look extensively, so it is up to you to come up with the “best” buyers for your business.

Approach the 5-10 alternative buyers as soon as you are ready with a decent presentation that your advisor has prepared. Do not go over personally to talk to the other businesses and do not send your advisor unprepared, either. Yes, time is limited, but not to the point that everything ends on the close of business tomorrow.

By now, hopefully, you will have one (non-binding) offer from your original buyer, but also a few from other buyers. Have we balanced the table? Well, we have certainly made it more even. But what if we have failed in our efforts to find other buyers? Well, then at least we know how weak our position at the negotiating table is and, moreover, we know that the single buyer does not know that. Believe me, it makes a big difference.

New Options

Let’s go back a couple of years in time to when you first had a glimpse of a thought about selling your business. Let’s say you began your preparation at that point. You hired an advisor to help you in the process. She prepared a thorough valuation that she explained to you and has kept current ever since. She identified the value drivers of your business and helped you improve your business in the eyes of the buyers. She now knows your business and your sector, inside out.

Now, having been prepared, and realizing that the sector is going through a consolidation phase, you approach the buyers — through your advisor, of course. You know who your best buyer is, you know how many other buyers there are and you have also been able to identify strategic private equity groups (PEGs), interested in your business. Your options are not only more numerous, but they are also better options. You know what each buyer is looking for. You know their buttons and how to press them.

Conclusion

What a difference preparation makes. Not only do you have more and better options, but you also have a business that is more appealing to buyers. Your million dollars is getting very, very, close.