HOME | MORE KNOWLEDGE | How the negotiation phase works
- You have decided to sell your business. It is ready for sale, it has been made value calculationThe market for potential buyers has been explored and the field has been narrowed down to the right buyer - and then what happens?
The prerequisite for entering into negotiations with a buyer is that a mutual confidentiality agreement has been signed. It is important that the company's information remains confidential and that there are no rumors in the industry that the company is for sale.
We anonymize some information, such as customer names and other potentially critical information. It is only at the end of due diligence , after the letter of intent has been signed, that the buyer receives the full information.
Here,John Nygaard from Business Broker reveals how the final negotiations in business transactions typically proceed.
"The first thing that happens when a seller and a buyer agree on the overall terms of the deal is that both parties sign a LOI - Letter of Intent. It contains, among other things, the terms of the purchase, the financial conditions and time of the deal, as well as guarantees and clauses."
The signatures on the LOI indicate that the buyer has exclusive rights for an agreed period and that there are no negotiations with other potential buyers.
Read also How to have a structured sales process when selling your business.
Due diligence – an exclusive insight for buyers of companies
The LOI also marks the start ofdue diligence, during which the buyer is allowed to view internal company documents, such as contracts with customers and suppliers, internal accounts, board minutes, and employment contracts.
"The buyer gets to turn over many stones in the company. Specifically, the documents are uploaded to a system that logs the buyer's activities. This way you can document what they have had access to and read," outlines John Nygaard and continues: "In this process, the buyer typically has a number of questions, and it's our job as the seller's advisor to ensure that the questions are relevant, that the seller answers the questions at a reasonable speed, and that they contain the necessary quality to ensure that there is flow in the process."
Price pressure, warranty catalog and tactics when selling a business
In this phase, the basis for a warranty catalog is often drawn up that specifies uncertainties on the part of the buyer. According to John Nygaard, this could be uncertainty about a complaint or an unresolved dispute. Based on the warranty catalog, it is typically agreed how the seller will provide security in relation to any future claims.
"The seller is often surprised that the buyer creates a warranty catalog because it makes a potential claim from a third party very tangible when depositing money. However, it is important for the seller to remember that a potential claim would have come anyway, even if the seller was still the owner," says John Nygaard and points out: "As business brokers, we must of course optimize value for the seller, but we must also outline a realistic process so that the seller is not disappointed. We must always ensure a good and constructive negotiation environment that paves the way for the desired transaction and any future collaboration between buyer and seller."
John Nygaard explains that there are usually big emotions at stake when a business owner sells his life's work, which is why it happens that the seller is offended when the buyer pushes the price.
"Here, part of Business Brokers is to remind the seller that it is only natural for the buyer to also focus onvalue-reducing factors. This ispart of the negotiation tactic, so the objections raised by the buyer must, of course, be handled constructively," he says.
When the business deal closes
Once negotiations are complete, a share transfer agreement is drawn up in collaboration with lawyers. The agreement is based on the LOI and includes everything the deal entails - including payment terms, shareholder agreement, guarantee catalog, employment contract if the seller is to continue in the company as an employee and possibly a lease on the domicile property. Here too, both buyer and seller benefit from a business broker who can make communication between the partners' lawyers more relaxed and practically oriented, ensuring that the parties do not jump ship shortly before the finish line due to text and clauses that the parties interpret differently.
"From the moment both parties have signed the share transfer document and the agreed purchase price has been deposited, the deal is complete. In this connection, a closing document is prepared which, together with the transfer document, makes the transaction effective and also marks the first day of the seller's new life," says John Nygaard.
5 tips for sellers in the negotiation phase:
- Have a realistic relationship with the values of your business.
- Pack away a lot of your emotions - buyer objections to valuation are tactics, not a personal criticism.
- Be understanding of the buyer's questions in due diligence.
- Provide relevant information about the company early on. Transparency builds trust and confidence and is the foundation for the best outcome.
- Be aware that the negotiation process costs resources and may contain surprises along the way.
