The Secret to Negotiating the Best Acquisition Deal

By Vistage Editor

The secret to negotiating the best deal? Let the seller set the price as long as you get to set the terms, says Vistage speaker Terry Gambill.

Price always represents the main “hot button” for sellers. When they’re out on the golf course with their buddies, they brag about how much they got for the business, not about the terms and conditions of the sale. However, it’s the terms that really dictate how the deal comes together. With a little creativity, the seller can get the price he wants while you walk away with the deal you want.

“For example,” Gambill said, “suppose a business owner wants $2 million for his company but you value it at $1 million. If you focus only on price, you’ll never close the million-dollar gap. But suppose you structure the deal as $100,000 down, $400,000 in five one-year, no-interest notes, and $1.5 million as five percent of sales over the next five years? The owner gets his asking price, yet the present value of the cash you will pay over the next five years is only slightly more than $1 million.

“Plus, you get the seller to share the risk. If the business goes into the tank over the next five years, you only pay five percent of whatever the business ends up being worth. By using terms in this manner, you can accommodate a wide range in price while protecting your cash flow and minimizing your risk.”

The most common types of terms used to facilitate deals include earnouts, consulting agreements, royalties as a percentage of the deal, seller notes (with lower-than-market rates or no interest at all) and step payouts based on company sales incentives. When negotiating terms, Gambill said, keep the following in mind:

  • Pay as little cash as possible. The best deals involve low down payments with future payments based on the performance of the company.
  • The best terms involve contingent payments. If the company doesn’t continue to perform, you don’t make the payments. Make sure that all contingent payments have a finite life by date, not by sales. Always have a cutoff date.
  • Any consulting agreements with the owner should be part of the deal, not an add-on.
  • Buy inventory on consignment, so that you pay for it as you use it over time. This frees up your cash flow and significantly reduces the time spent on due diligence.

“It’s always easier to reduce risk through creative terms than through lowering price,” explains Gambill. “The more you can use terms to get the seller to share the future, the more you share the risk of the acquisition. Every deal has so many variables that it’s hard to understand the true value of the business. The protection comes from the terms.”

Negotiating Tips

In terms of the overall negotiations, Gambill offers the following advice:

  • You can’t negotiate a good deal unless you’re willing to walk away. A primary cause of bad deals is the failure to walk away, especially deep into the deal when you discover a problem.
  • Probe on price but don’t react to the answer. If the owner throws out a ridiculous price, calmly reply, “That’s interesting. Sometime when we have a chance, I’d like you to explain to me how you got that number. I’m sure you have some benchmarks and have calculated it. But right now I’d like to talk about … ” Then change the subject to something unrelated to price.
  • Early in the relationship, look for ways to softly say “no.” For example, if the seller asks for information that isn’t public knowledge about your company, say, “I’m not ready to share that right now,” and shift the conversation to something you are willing to talk about. This demonstrates a willingness to say “no.”
  • Keep your ego in your pocket. Ego kills a lot of otherwise good deals.
  • Attorneys and intermediaries do not make good negotiators. Limit the attorney’s role to helping you document the deal and making sure all your decisions are properly and legally implemented. Intermediaries, particularly those who are paid on commission, will encourage you to accept a mediocre deal.
  • Hire a professional negotiator. Keep in mind that you still have to work with the other company (and in many cases, the owner) after the deal. A professional negotiator can come across as the “bad guy” and do all the tough things that you can’t or don’t want to do. If the negotiations stall, you can come in wearing the white hat and rescue the deal.
  • Go slow and build the relationship. If the seller likes you, chances are he will show more flexibility in price and terms.
  • Avoid an auction situation. The last thing you want is to have the seller playing two or three potential buyers against each other.
  • Keep asking why the company is for sale until you feel comfortable with the answer. There are many good reasons for selling a company. You need to know why this particular owner wants to sell, especially if he wants to stay on. “The bottom line is that in order to negotiate a good deal, you have to be prepared to walk away at any time,” concludes Gambill. “If you get emotionally involved, if you start giving too much here and there, you may suddenly find yourself in an untenable deal. Constantly ask yourself, ‘What will cause me to walk away, and am I there yet?’ Knowing your walk-away points and sticking to them will save you a lot of grief in the long run.”

Vistage speaker Bill Hodge agreed. “Before negotiations begin,” he explained, “determine the most you are willing to pay for the business by setting your walk-away price. As negotiations proceed, negotiate terms to redistribute risk and protect yourself from inadvertently assuming unknown or non-disclosed liabilities. Remember to use a professional to negotiate for you.”
Originally published: Aug 16, 2011

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