How to balance seller and buyer goals when selling small businesses
September 22, 2023 ⋅ 5 min read
If there's one thing I've learned in this business, it's this: Buyer and seller goals must eventually align to sell a business.
It seems intuitive, right? A deal requires compromise.
Negotiating a small business deal is easier said than done, and as an M&A advisor who's helped thousands of owners find their path to an exit, I've seen it all. In this article, we'll talk through a common scenario many sellers face to show how balancing the needs of both parties can pave the way to a successful sale.
How to identify what you want out of a sale
Sellers and buyers each have their own goals (some more realistic than others). Before conversing with potential buyers, it can be helpful to take some time to identify what you want from a sale. Of course, selling a business can often be a financially driven decision, but there are many other personal reasons that can make right now the right time to sell.
For example, you might be ready to invest your time, energy, or money into a new business that you find more invigorating or want to spend more time with family and friends. It's important to take stock of your situation and what would make the sale meaningful for you while also considering the market and other factors. Learn more in our guide to determining the right time to sell a small business.
Balancing seller and buyer goals in negotiations
Ultimately, buyer and seller goals should converge at some point in negotiations - as you get closer to striking a deal. Typically, though, each begins the process completely oblivious to each other's needs.
Let's talk through an example so we can see how this plays out.
Suppose you've owned an auto service station for over 30 years. You are tired of all the hassles and have made a lot of money over that time. Plus, you are in the typical "retirement age" of your 60's. Let's say you also own the real estate and plan to keep it for retirement income - a reasonable goal. Ideally, you'd like to strike a deal with minimal seller financing.
After going to market with your friendly M&A advisor, you find the perfect buyer - "young blood," an excellent mechanic who has been running a local competitor's shop for the past five years.
Perfect situation, right?
But then, the buyer looks at bank financing and sees that the business's cash flow is enough to buy the business, but at current interest rates (11% in 2023), not at the price you want. He asks for some heavy seller financing — and you balk.
The buyer's banker may offer to package up the real estate with the acquisition loan and stretch the term to 30 years — which makes the cash flow sufficient to cover the loan and much closer to your ideal sale price.
"But what about my rental income?" you ask. This is a reasonable question, but in this situation, your goal of keeping the real estate conflicts with your goal to avoid heavy seller financing. Goal vs. goal, as it were.
The buyer may see this behavior as driven by greed or dismissive of their needs and may begin to withdraw. Even so, your business is conveniently located for them, more stable than their current job, and acquiring it will help them meet their goal of achieving financial independence.
In this case, the buyer is dismissive of your retirement income goal and, at the same time, risks missing out on their chance to meet their big life goal: financial independence.
As the seller, if you sell the real estate, you are giving up the future rental income while gaining significant immediate capital from the sale. You are also reducing the risk of the buyer not paying back all the seller financing. In truth, many deals require some degree of seller financing to get them over the line, so it's worth considering.
Of course, you will face higher capital gains taxes the larger the transaction - learn more about the tax implications of seller financing so you can enter negotiations prepared and knowing your boundaries.
The buyer's CPA may ask to speak with your CPA to come up with some ideas that will mitigate your risk and still provide you with retirement income. There are a few ways to get this done - but that's for another article.
Ultimately, the way to the finish line is the compromise that helps both you, as the seller, and your buyer meet your goals. Cue the champagne!
The bottom line
Talking to a trusted advisor can help you assess your goals and needs versus a buyer's goals and needs to arrive at a win-win deal. Negotiation is an art that takes time to perfect; hiring an experienced M&A advisor like Baton can give you confidence going into the sale - knowing you've got an expert in your corner every step of the way.