How To Create A Bidding War For Your Company

A whole lot of psychology comes into play when negotiating a sale—and if the deal isn't a win for both sides, it will likely fall apart. Here's how to get the exit you want.

The sale of your company begins with negotiations. You can’t enter into a purchase agreement without first negotiating on various points. It’s human nature to negotiate and to want to negotiate the best deal for ourselves. It’s just how we’re built. We all want to win.

However, if you don’t negotiate a win for both sides, your deal will likely fall apart, or one side will perhaps move forward with a lingering feeling that they are not getting what they wanted. They did not win; therefore, they will end up frustrating the process and may still eventually back out. Granted, neither side will win on every point, which is why knowing each side’s non-negotiables and negotiables is imperative.

A large amount of psychology goes into negotiations, starting with knowing your buyer. It’s important to know their buying criteria, their WHY, and their most important points. Is it price, the down payment requirement, the employment agreement, or the terms of the noncompete? A good M&A agent or broker works with buyers and sellers to prioritize what the most and least important items are to each side, because not every point of contention is equal.

Know your buyers and their possible negotiating tactics

The type of buyer you’re working with may reveal how good they are at negotiating and what’s most important to them. Each type of buyer that we will discuss in this chapter will come to the negotiation with different perspectives and priorities. Let’s revisit our types of buyers and identify their priorities.

• First-time buyers

These buyers usually make decisions based on emotions, not logic. They are nervous, skittish, and overly concerned about making a bad decision and losing their life’s savings. These buyers must be handled with kid gloves, because they are typically the most likely to back out of the deal.

Most important: First-time buyers need to feel secure and that they have made a good decision.

Non-negotiables: 

• Showing the first-time buyer the valuation that supports the business price tag

• Seller financing

• Training

• Consulting agreement

• Noncompetes

• Reps and warranties

• Working capital

• Competitors and strategic buyers

These buyers make decisions mostly on logic; however, some make decisions on emotions, especially if acquiring a specific business will catapult their company to the next level. This could dramatically improve their business and their quality of life.

Most important: Find out what they are buying and what the most important point of contention is to them, because competitors and strategic buyers buy synergies. Ask yourself whether they are buying your people, product, processes, proprietary, patrons, or profits. It’s always better to negotiate when you can negotiate from a basis of strength, rather than weakness.

In the case of one oil field company, the strategic buyer was buying patrons and intellectual property; they wanted the BP contract and were willing to pay 65 percent more for 70 percent of the company, because they knew they could get an ROI from the BP contract quickly with their other company. It’s not always about price.

Non-negotiables:

• Employee contracts and noncompetes

• Client contracts and master service agreements that are transferable

• Including all intellectual property

• Sufficient working capital, which includes accounts receivable and inventory

• Owner’s equity

• Owner’s noncompete

• Reps and warranties

• Will typically require 20-30% of seller financing, but may not agree to secure it with a personal guarantee

In most cases, they will not sign a personal guarantee on the seller financing. They will not want a seller financing personal guarantee to show on their financial statements and keep them from borrowing for future transactions.

Private equity groups

These buyers know their (or their family office’s) buying criteria, what they’re willing to pay, and the terms they must negotiate on. They will negotiate some but not much, because they have other deals lined up.

Most important: 

PEGs buy strictly on logic. Most PEGs are buying tenured employees, management teams, intellectual property, products, patrons, and profits. They are primarily concerned with business synergy, sustainability, potential for growth, and financials that are trending upward. PEGs require audited financials and projections.

Non-negotiables:

• Owner’s noncompetes

• Employee agreements and noncompetes

• Client contracts and master service agreements that are transferable

• Including all intellectual property

• Sufficient working capital, which includes accounts receivable and inventory

• Reps and warranties

• May require 19-20% seller financing, but will not agree to secure it with a personal guarantee

Turnaround specialist

These buyers buy strictly on logic. Turnaround specialists (TS) buy distressed businesses that they can turn around and sell for a profit.

Most important:

A TS is interested in pricing and terms. They want to know how cheap they can acquire the assets, as their intent is to improve and flip it for a profit. Some will pay all cash, and many want to pay a small deposit and finance the balance.

Non-negotiables: 

• Low price (as the business is failing and won’t demand a high price)

• Seller financing terms

• Many will not sign a personal guarantee

• The ability to assign the purchase agreement or LOI

As you can see, many more factors other than price are involved in a sale. That’s why knowing how to negotiate is key. Negotiating is an art, requiring skill and years of experience. Again, the most important things to know are who your buyer is, their WHY, their negotiables, and their non-negotiables.

Mentoring Corner

When you enter the final negotiations of the sale of your business, both you and the potential buyer have invested time and resources to get to this point. There are emotions on both sides of the table, as well as a few surprises during due diligence on both sides, which can cause more excitement or greater caution moving forward. Know what your non-negotiables are before you get to the table, and have a neutral party or an advisor or broker help get you to the finish line.

There will generally always be a give and take needed to get to the win-win handshake. When you feel your emotions kick in, take a break and walk away before responding. It may help you process the request with a clearer head.