Selling a Business, Part 2: How to Negotiate

March 3, 2008
The seller should do everything possible to keep negotiations moving.

The seller should do everything possible to keep negotiations moving. The requires being prepared with all information and allowing for different payment options.

Picking up from where we left off last month, the decision has been made to explore the sale of a vending operation. Last month’s article examined the homework that needs to be done before the vending operator presents his/her business for sale.

A recent article in The Wall Street Journal noted that experts suggest small company owners get organized three to five years before they plan to exit the business. Every smart business owner should have an exit strategy.

A common observation from those who have traveled down this road is that it always takes longer to prepare all the parts needed, and lay them out in a smooth prospectus, than expected.

At this point, the owner has done all in his power to achieve the highest possible selling price for the company. He is on top of every last detail of his business and outwardly displays full confidence that his offering has high value. This posturing is one of the most important elements in effective negotiating.

It is now up to the prospective buyer to give some indication of what that price will be. In negotiating, it is always best to let the other party lead out with the first offer.

Thus the negotiating process is opened. I cannot overemphasize how important it is for the seller to be prepared to answer any possible question that may come up with crisp, clear facts and full disclosure.

Once the negotiations have begun, it is important that they move along at a steady pace. If the negotiations have to be put on hold because someone doesn’t have all the important information, the delay could jeopardize the transaction.

This is not fun and games. It is in the best interest of both parties to move expeditiously through each step. At the first indication that this is a waste of time and energy, any astute business person should immediately pull the plug on the entire process.


If the prospective buyer smells a fire sale, it will result in a low offer and very one-sided terms and conditions. Once the negotiations have begun, it is important for the seller not to give the impression that he must sell. In fact, it is a good idea to have a plan behind the plan just in case the business does not sell. When it becomes evident that, for whatever reason, your business is not going to sell, get back to plan “B” (recapitalization, downsizing, diversification, management reorganization, etc.,) without delay.

Negotiations often involve three sometimes inconsistent objectives from the seller’s point of view: speed, confidentiality and maximum value.

Following are negotiating tips:

  • Act with absolute truthfulness and clarity in all negotiations so that any potential deal breakers surface early and can be dealt with before the 11th hour.
  • Point out all non-negotiable items early.
  • Decide up front who the ultimate manager of the selling process will be within the company; only one person should do the talking.
  • Have a schedule for the selling process; keep the momentum going. Deals that drag don’t close.
  • Set up a complete file, in one place, with of all relevant information regarding the sale.
  • Be sure you are negotiating with the decision maker. A lot of time has been wasted in negotiations with the wrong person.
  • Be sure you have an interested buyer who has cash or can obtain financing. If you question his ability to obtain financing, require him to submit a letter from his bank validating that he has the financial ability to do the deal.

In some instances, an employee or an employee group might be interested in buying the business. Often, employee groups must borrow heavily to buy the company, and as a result, they will be forced to run the company on a shoestring. The leading cause of all small business failures is undercapitalization at the outset.

Employee buyouts can be successful, but the seller needs to be careful here. The hopes of a sweetheart deal by the employee runs high; after all, he or she is a loyal employee, not an outsider. When the price of the business is revealed, and the difficulty of obtaining workable financing is understood, these hopes are soon dashed and a fractured relationship results.


Seller financing is another option that has proven useful in making a deal. When the seller holds the paper, he or she provides an unwritten guarantee that the business will generate enough profit to make the payments. Therefore, the seller shares the risk of the future profitability of the business.

A well-structured financing agreement will provide protection for the seller. If the buyer defaults, legal action is taken, and foreclosure comes into play. In that case, the seller will be entitled to keep any down payments and monthly installments the buyer has paid up to that time and sell the business again. Just remember, litigation is never fun.

If the seller will accept a smaller down payment and agrees to carry the balance at a favorable interest rate, a higher price can be achieved. If the seller demands all cash, the price will be lower.

Surveys have shown that sellers who demand all cash get 70 percent of the asking price, while sellers who agree to terms get 86 percent of their asking price. Sellers who do not have an immediate need for the net proceeds from the sale of their business have a better chance of getting a higher price for it.

Seller financing allows sellers to spread a gain out over many years or postpone all of it, giving them the ability to defer and, in some cases, reduce their tax liability. For sellers approaching retirement, this method can provide a source of income.


The seller should go out of his or her way to be polite and friendly to the buyer, even when it hurts. This is more important than you might think. It is very difficult to structure a deal between parties who don’t like each other.

In an effort to devalue your business, some investors will take oblique shots at the quality of your company. They may even question your competence as a manager. This is very hard to swallow, but before you throw him or her out the door, try to remain unemotional and stay focused on the big picture.

When an impasse hits, don’t get discouraged. Even if it looks like the negotiations are not going well, stick with it. This is hard work, but, hammering out a win-win agreement is worth the effort in the end.


When negotiations stall, one option is to change the “shape” of the money: suggest a different payment schedule, a smaller down payment, or a balloon payment.

The escrow hold back deposit, which guarantees no lost business, and the accuracy of the seller’s representations is always an area of intense negotiations. The length of time and amount of money held back can be negotiated.

An “earn out” arrangement often occurs when the seller presents a recasted financial projection that suggests stronger future profits. The purpose of an “earn out” is to allow the buyer and the seller to share in future profits which accrue above and beyond the profitability shown at the date of purchase.

Typically, the obligation to achieve these new profits is placed squarely on the shoulders of the seller who stays on to manage the business under an employment contract, hence the term, “earn.” If you want a higher price, Mr. Seller, you will have to “earn it.”

A word of caution here: earn outs are notorious for creating bitter disputes after the sale. The seller (now merely an employee of the buyer) must have reasonable control over decisions that will enable the business to achieve higher profits.

Next month, we will examine the acquisition process from the buyer’s point of view.

Tom Britten, NAMA Knowledge Source Partner, is an analyst, intermediary and professional consultant with more than 30 years of industry experience. He functions as a full service resource available to all vending, OCS and foodservice companies, large and small. Contact Britten Management Services, LLC for a free and no obligation consultation at 813-469-5437 or via emai at: [email protected].


Post acquisition decline in workplace morale is fueled by potential layoffs, new bosses, and in general, an agonizing fear of the unknown. Left adrift, employee morale rapidly descends to a low level.

The proud new owners walk in one day to find that everyone is miserable. The company can do no right, the bosses are all idiots, and highly valued team members are suddenly looking for new jobs

This is especially evident in the aftermath of an acquisition or takeover. When owners and senior level executives, preoccupied with meeting return on investment projections, keep their noses stuck in financial statements, the de-facto opinion leaders of the rank and file (who are not only the most pessimistic, but also the most vocal) take over.

Rote, “feel good” announcements are delivered halfheartedly by low level managers and supervisors. Efforts at cultural blending amount to little more than lip service. Detractors have a field day shooting holes in management’s meager attempts to deliver positive messages and prop up morale.

Only when the poor morale shows through in the financials, do owners and senior executives get involved. Too little, too late, the adverse cultural twist is now embedded and can take decades to reverse.

The root cause of this scenario is failure to recognize the most important asset acquired. Because measuring and controlling financial performance is relatively easy when compared to measuring and controlling employee morale, this is an easy trap to fall into.

Early implementation of a carefully crafted plan for assimilating groups of different people into one homogeneous unit can make the difference between a successful acquisition and a dismal failure.

Tom Britten is president of Britten Managment Services, based in Lutz, Fla. He is a longtime vending industry veteran. He can be reached at 813-792-9719; email: [email protected].