When Selling a Business, Relationships Matter

You can buy or sell a home and never meet the other party in the transaction. This is almost never the case in the sale of a business. In fact, the relationship between a buyer and seller in a business sale may be the single most important element of the transaction. However, the significance of this relationship is too often overlooked.

The majority of small business transactions (sub $10m) are between a first time seller and first time buyer. Buyers and sellers often describe the process as far more complicated and frustrating than they had anticipated. This is because business transactions are quite complex. In the sale of a home, there is a significant amount of predictability to the process. If a buyer finds a home that fits their needs, qualifies for the loan and there are no major inspection issues, the transaction is likely to be completed, with very few obstacles.

Business sales have far more levels of complexity. The price and terms are often dictated by many of a company's individual characteristics as opposed to industry comparisons. Beyond getting a buyer and seller to see eye to eye on valuation, there are ongoing potential changes that a business may experience throughout the length of a transaction, whereas real estate is seldom affected by outside influences in the length of time it takes to complete a transaction. i.e A business may gain or lose value during the duration of the sales process due to changes in market conditions, lost or gained clients and key employees, litigation, inventory fluctuations, bad debt...the list goes on and on. Beyond being susceptible to obstacles from a changing environment, there are a vast number of deal points that need to be negotiated beyond the price and payment structure. i.e. non-compete agreement, training and transition, included vs excluded assets, transfer of accounts, licenses, IP, etc.

These complexities are often what leads to the compromise of a solid relationship between a buyer and seller. If there is a single issue, there is generally a reasonable amount of give and take by both sides and the relationship remains intact. When there are a multitude of issues with outstanding resolutions, often a buyer and seller will perceive the gap to be much larger than what is reality. Given the nature of buying or selling one's first ever company, emotions may run high. When this occurs, it is paramount for buyers and sellers to take diligence in how they communicate with the other party. Small problems can result in big blowups that lead to terminating a deal that actually made sense for both parties.

Upon completing the sale of a business, the transition period is going to likely involve a significant amount of interaction between the buyer and seller. With this in mind, it should be an absolute priority to maintain a cordial relationship throughout the duration of the negotiations, due diligence and contingency periods. At times, giving in to the other party's wants could cost very little while the upside of an improved relationship could result in much greater overall value.

Here are some best practices for establishing and maintaining a solid relationship with the other side:

• Avoid In-Person Negotiations: Not only will you avoid committing to something in jest, misunderstandings are very prevalent during in-person negotiations. All proposals should be in clear writing to avoid any ambiguity.
• Don't Overreact: Overreaction is the leading cause of a failed negotiation process. Take your time in responding, even if you are certain of your position. Allowing both parties to "sleep on it" will generally result in a more rational response and better reception.
• Put Yourself In Their Shoes: This advice applies to all relationships but is easier said than done. Keep in mind, the process is just as challenging and frustrating to the other side. If they have never bought or sold a business, it can be increasingly fragile. If you're a buyer, don't forget that in addition to selling to you, the seller has a business to continue operating in the interim so some of their frustrations may have to do with day to day challenges that don't involve you. If you're a seller, don't forget that the buyer is investing their hard-earned money. They don't need to buy your business or any business, for that matter.
• Separate Each Issue: When there are a million little things, they collectively feel very big. This is tip for problem solving in general. Don't let one problem give more weight to the next problem. If you isolate each issue and focus on a singular solution, the perceived enormity of the situation won't feel so vast.
• Prioritize: Some buyers and sellers become very entangled in principal. i.e "5% interest on the seller financing is unreasonable! It should be 7%." If you take a step back and calculate the difference in total interest, you may find this to be a $10,000 gap. $10,000 is certainly a lot of money but it is all relative. If you are negotiating a $2,000,000 deal, $10,000 may not be such a priority. It may be helpful to actually write down each outstanding issue and order them from most important to least, again tackling one at a time.
• Choose The Right Intermediary: If you are attempting to buy or sell a business and are working directly with the other party, you are far more likely to experience a failed transaction. A skilled intermediary will help coach you on what to expect and will be the glue that keeps the deal together. Keeping your distance from the other party in the negotiations can help you focus all of your time with one another on relationship building.

For more information on this and other important business selling advice, please contact the author, Dustin Sigall. [email protected] (858) 382-4974.

Dustin Sigall and his partner, Sean Seaman, have sold over 180 businesses nationwide since 2007 and conducted thousands of valuations in a vast array of industries.