How to Negotiate a Better SMB Acquisition
Small and medium-sized business (SMB) acquisitions are investments that change the course of your life. Your deal is likely to secure your financial future and ongoing lifestyle freedom. The true extent of that transformation comes down to the negotiation process. Negotiations are your chance to reduce the purchase price as much as possible and win terms that make your investment optimally impactful.
Negotiations are often the last hurdle you need to clear before your target business becomes yours. By the time you reach this stage, you have researched the company, gotten to know the seller, and wrapped your mind around operations. Through the process of due diligence, you’ve uncovered information that alters your initial impression of the deal. Now, it’s your opportunity to utilize what you have learned to negotiate the best deal possible.
Negotiating an SMB acquisition can be a complex process, but with the right approach, you can increase your chances of securing a phenomenal deal.
Key Takeaways:
Build a relationship with the seller and learn how to best communicate during negotiations.
Use the information you learn in the due diligence process as leverage.
Ensure your proposal will be attractive to the seller.
Think outside of the box to find solutions that work for both parties.
Know your limits and avoid backing down on points that are priorities for you.
Build a Relationship With the Seller
Building a strong relationship with the seller benefits your process in many different ways outside of negotiations. The better your relationship, the easier the process will be for you. This means respecting the seller as the ultimate knowledge holder—even if you see obvious areas for improvement. As the seller gets more and more comfortable with you as a potential buyer, they will more freely provide foundational knowledge about the company that can assist in negotiations.
As you are working through the LOI and due diligence processes, you have the opportunity to strengthen your relationship and build trust before negotiations even begin. Get to know the seller’s communication style. Understand their motivations for selling and their priorities within the business. Find common ground where your careers or goals overlap. Rather than seeing the seller as an obstacle to your investment, treat them like a person who is also making a life-changing decision.
Once you get to negotiations, your relationship with the seller will help you advocate for both your own desires and the needs of the company. You will know the best ways to communicate and be able to speak to the seller’s priorities. This familiarity will ease talks and help you make better decisions during the negotiation process.
Lean on Due Diligence
The main purpose of due diligence is to determine whether you should move forward with your deal. You’re asking the high-level question: Is the purchase price truly worth what you would be getting with the company? If the answer is no, you then need to determine if any changes to the purchase price or deal structure would make the deal worthwhile. If so, your next step is negotiations.
The due diligence process including your Quality of Earnings (QoE) report will uncover a depth of information about your target business. It verifies the calculations that the seller made to arrive at the asking price and establishes whether the company will be able to continue performing as well after ownership changes hands. During this process, you will also learn details like whether the existing management team will stick around after closing, if you can expect to lose any customers or contracts, and the immediate steps to take if you do decide to purchase the business.
The most successful buyers find a way to use the information that is gathered during the due diligence process as their leverage during negotiations. This is the evidence that you will use when you’re arguing for a lower purchase price or better terms.
Create a Compelling Proposal
Before going into negotiations, you need to know your strategy. Understand what you’re looking to win. A lower purchase price? Seller financing? Better terms? Then, find the most compelling arguments to persuade the seller and the seller’s team that these items are deserved.
This is where your relationship with the seller will come in handy. Don’t just negotiate based on your own needs. Consider what will be appealing to the other side. Base your strategy around the facts and the leverage uncovered during diligence, but present them in a way that will connect with the seller.
While advocating for your own needs, make sure to emphasize points that might be important for the seller. For example, many small business owners will be concerned about their existing employees or their legacy as a founder. By respecting the wishes of the seller, you are showing that you are negotiating in good faith. This puts you in a better position to persuade.
Offer Creative Solutions
Don’t let your deal die based on price alone! Look for creative ways to get value out of your deal. If the seller won’t budge on price, consider terms that might be more advantageous on your end. For example, seller financing, earnout agreements, and retention agreements might add value on your end without impacting the price. Think through any other aspects of the deal structure that can help you mitigate your own risk.
This strategy goes the other way as well. You might be able to make creative offers that appeal to the seller in exchange for something you see as a must-have. For example, a seller of a family business may want you to keep their children employed by the company. While this might not be something you’d ordinarily want to do, making a concession in this area might give you leverage to negotiate a different point in your deal.
Know Your Limits and Be Prepared to Walk Away
Decide your limits ahead of time when you have a clear head. No matter how much planning you do, it can be hard to stick to your limits when under pressure. That’s why it’s helpful to understand your boundaries before you make any decisions. Thinking through your strategy will help you abide by your own rationale rather than impulsively making poor decisions. If you get blindsided by something new during negotiations, remember that you can ask for time to walk away and think through your decision or come up with a counter.
When you approach negotiations with the recognition that there is a chance you will need to walk away from the deal, it will be easier to remain steadfast. If you have an emotional stake in the business or the deal, you might end up making concessions or decisions you wouldn’t normally make. That could land you with a worse deal than you might get if you remain firm yet respectful. Keep in mind the reasons you’re making a deal, and that will help you stay the course.
Need support with your deal?
We have helped our clients close hundreds of SMB deals—on their terms. Our support can extend from due diligence into the negotiation process. We can help you leverage the knowledge from your QoE to negotiate a deal that truly gets you the most out of our investment.