Your approach to the contract negotiation process will depend upon a
range of variables, some of which will be beyond your control.
The most obvious example of this is
the attitude of the buyer who may employ a range of different approaches, and
will have priorities and processes which will probably only be partially known
to you.
Obviously, the buyer’s attitude
approach and priorities, will have a major effect on how the negotiation
proceeds, how far it gets, which contract variables are altered or conceded,
and ultimately whether you get a deal at all.
There are several important things to
remember when stepping into this process:-
1.
BEGIN WITH THE END IN MIND
As the seller, by setting the initial
parameters for negotiation, you have some control over where the process
begins. Your broker (if you have chosen the broker well), should
have been conditioning the buyer, and attempting to set expectations, throughout
the purchase introduction process. The broker (and you if there have
been face to face negotiations), should have given a fairly clear indication of
the variables in the contract which are important and/or non
negotiable. Having said that, most things are negotiable to some
degree. Your initial approach and parameters, should be set up to allow some
room for negotiation by the buyer, and give a reasonable expectation to the
buyer of what you will and won’t accept, whilst at the same time being
somewhere near reasonable.
You and your broker should have
discussed this, and have a strategy in place.
2.
DECIDE WHAT’S IMPORTANT
It is exceedingly rare for the buyer
of anything, let alone a business, to step up and immediately agree to every
variable of the deal. It is important for you to decide which
variables are important and which ones are not.
There are essentially three
categories and variables for you to consider:-
a.
Central and not negotiable
b.
Central and negotiable
c.
Throwaways
a. Central
and not negotiable
Examples of this category might be an
absolute requirement for a guarantee from a purchase of company, or the
requirement for the buyer to obtain a new Lease rather than an assignment of
the existing Lease. The purchase of a business with the assignment of an
existing Lease renders you liable for rent to the landlord, for the balance of
the rental term. If this is a significant amount and you have
concerns about this ongoing liability, a requirement for a new Lease will rid
you of this liability. Likewise, where you have a purchaser that is
a company, and you are uncertain as to its asset base or solvency, a guarantee
from the directors (and, these days, the spouse(s) of the director(s)), is
really quite essential.
b. Central
but negotiable
The purchase price is the most
obvious example of this situation. The amount you receive as the sum
of your business, it’s critical for your future, but you can certainly expect
the buyer to want to reduce the price. It is quite common for contracts to
be received which have several prices crossed out, one after the other, before
a final figure was reached.
c. Throwaways
A good example of this is the
restraint clause.
The buyer might well be extremely
keen to see you out of the industry for a significant period of
time. If you are leaving the industry entirely, and have no plans to
return, this is something you might throw away, in exchange for, for example,
keeping the purchase price higher. All this will need to be negotiated
during the contract completion phase.
3.
THE ROLE OF THE BROKER
The broker will earn significant
permission on the sale of your business. The brokers role is to find and
introduce a buyer who is ready willing and able to complete.
The broker should also be assisting
you with:-
a.
Conditioning the buyer to the important parameters of the deal, upon
which you will not compromise;
b.
Relaying important information to you about the buyer’s priorities and
attitudes;
c.
Manoeuvring the buyer towards a contract which best suits you.
Many people, buyers particularly,
make the mistake of assuming or believing that the broker is an unbiased
mediator between the parties. This is untrue.
The broker quite literally and
legitimately, is your agent, and, if he or she wants a commission, must act in
you interests to get a contract together.
The other side of this coin however,
is that the broker cannot act in a false or misleading way. The
broker is your agent and you will be responsible for any improper conduct
undertaken on your behalf. It is not a sustainable approach from
either you or the agent, to attempt to hoodwink the buyer into buying a
business, as, at some stage either before or after settlement, the true facts
will come to light and you will be held accountable for the acts of your agent.
Having said all of this, an
enthusiastic and skilled broker can create appropriate deals where each party
“wins”, where, in many other circumstances, a deal will not materialise.
The broker is also a worthwhile
circuit breaker between you and the buyer. It is very often
extremely worthwhile to be able to deliver information through a third party,
and avoid directly having to answer questions on the spot. Having
the broker relay information, allows the possibility of time for thinking, and
ensures the provision of appropriate information.
The broker is also (or should be), a
skilled negotiator, focused solely on the sale deal. Remember, in
these circumstances, you will still have the business to run, and this must
remain a focus.
4.
NEGOTIATION STYLES
The character, personality and
approach of the buyer is a major variable in the contract negotiation process.
There is a large number of types of
approach and list below is by no means exhaustive.
Some of the styles of negotiation
which are often seen are as follows:-
1) Direct clear and
simple
2) “Soviet style”
3) “Chinese Style”
4) Pushy
5) Round and round
1) Simple
Clear and Direct
This is the buyer who displays a
“what you see is what you get” approach. The buyer presents a
contract with variables that are somewhere within the bounds of what you
consider to be a deal, and is willing to respond to a counter offer that you
might make. Responses to your proposals are returned in a timely way
and the negotiation proceeds at a reasonable pace. These are the
easiest buyers to deal with.
2) Soviet
Style
Soviet style negotiation (named for
the cold war negotiating style brought to prominence in 60’s and 70’s), opens
with assumingly impossibly low offer and then proceeds at snails pace with tiny
concessions away form that original position.
An example of this approach would be
that if you have indicated a purchase price of, say, 20 with an expectation
that you might settle it around 16 or 17, the Soviet style negotiator’s first
offer will be 4, and might then proceed very slowly to 5 or 6.
In the face of an extremely low
offer, particularly initially, the best options are:-
a) withdraw from the
negotiations and brand the offer ridiculous;
b) Refuse to make a
counter offer until the serious proposal is put forward
c) Feign insult and go
silent.
3) Chinese
Style
This style of negotiation, much
applied in South East Asia, involves running a negotiation over long time
frames. Each issue dealt with one by one, and, similar to Soviet
Style, concessions are small and well spaced apart. This style of
negotiator is looking for somebody who is impatient or desperate, and will
attempt to make a “big concession” to bring the matter to a close. Patience
is the key with this style of negotiation and you must walk the line between
keeping the matter going at a reasonable speed, and, at the other extreme,
appearing needy or anxious.
The best response to this style of
approach is to attempt to meet the size of the concessions being made, with the
size of your own concessions, and try to be patient. Making large
concessions to attempt to prompt similar large concessions from the buyer, will
not work with this type of buyer. This may be frustrating but trying
to force the pace will be interpreted as desperation, and you may well end up
with deal parameters well below your expectations.
4) Silent
approach –
Some buyers will make an offer and
then go silent
Bennett Carroll Solicitors have offices located in Brisbane and the
Sunshine Coast
Freecall: 1300 334 566
Fax: (07) 3343 8664
Fax: (07) 3343 8664
