Greed Can Kill A Business Deal In An Instant

We were recently approaching an agreement between a buyer and a seller when the deal suddenly got shaky. The buyer proposed a price that was just 5% lower than the ask. The seller was so offended, he balked and started questioning his decision to sell in the first place. Make no mistake…

Greed can kill a business deal in an instant.

In some ways, it’s understandable. If you’ve put your heart and soul into a business, you may have a hard time taking a penny less than what you feel it’s worth. In fact, we find that about half of the sellers we work with start by highly overvaluing their business. If you really want to sell, you’ll need to check your emotions at the door and set some realistic expectations.

Seller’s rules of thumb

  • 10 to 15% of the asking price. That’s a normal range for negotiation. Very rarely does a business sell for its full asking price or more. Talk with your broker ahead of time about your bottom line. Agree on the lowest price you’ll consider. And don’t forget it when the offers begin to arrive.
  • 2.5 to 3.5 times cash flow.While the expected multiple varies from industry to industry, 2.5 to 3.5 times cash flow is a reasonable price range for most businesses. Brokers, buyers and lenders are likely to be on the same page.And most buyers are smart about what they’re seeking. They’ll analyze your business and consider taxes and debt service, as well as their own need for income. They won’t begin to consider your business if the multiple is outside the expected norm for that sector.Your broker can share industry information to help you see what similar businesses in your market are going for. It’s like looking at comps when you sell or buy real estate. Setting a price is an art, not a science. But this art has some pretty clear boundaries.
  • Six months to a year.That’s the typical timeframe for the selling process. The cycle can be shorter if you’re well prepared and the market for your industry is strong. It will take longer if you have a lot of preparation work to do or your industry is more specialized. This is another case where you’ll want to start talking to your broker right away and begin learning about the steps necessary to prep for a sale.

Communication is key

We were at a closing a few weeks ago when a family member/partner began questioning the details of the financing. She expected a larger check, and her greed threatened the closing! The primary owner had not communicated the financial details clearly to the rest of the partners.

So be sure to inform and get agreement from your partners – and your family – at the start of the process. It’s a good idea to touch base again when you receive your closing statement a few weeks before the closing date.

You have a right to be proud of the business you’ve built and maintained. And it’s natural to expect a yield that meets your needs. These tips can help you keep your expectations reasonable while you’re working out a fair and satisfactory deal.

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