8 min read
This article has been translated from our English edition.
The opinions of the employees of You are personal.
… wanted his “baby” to be successful
After 9 months of roller coaster negotiations, I was unable to sign a sales contract with a small business owner. He wanted to buy his patents, trademarks, business contacts, digital and physical assets that formed the basis of his business. Through my due diligence and many honest conversations with the owner, it was easy to spot his flaws and I was confident that with my experience, guidance and assets I would be able to succeed. Unfortunately, after several last minute attempts to address your inquiries and concerns, I was unable to close the deal. I was shocked. After many hours of reflection, here are the mistakes I made that we hope you can avoid when dealing with a small business owner.
You need to know what the seller wants from the deal. That seems obvious, but sometimes what they want isn’t obvious even to yourself. They have to dig deep and read between the lines to discover their unrecognized motivations. For example, the owner stated that he wanted his “baby” to be successful and get paid when the business becomes profitable. Unfortunately, after much discussion, I realized that he really wanted to be paid for the dollars and time he had already invested in the business. This was a success for me because obviously I wasn’t going to pay him any sunk costs. Make sure you dig deeper into what the owner says upfront to really understand what they want. That saves you a lot of time in the long run.
Image: Thomas Barwick | Getty Images
Do you really know the seller? I found learning about his family, community, financial situation, interests, and more to be invaluable, but the most important piece of information I would like to know early on is how he likes to negotiate. In this case, the owner did not want to negotiate. In fact, if he didn’t like a suggestion or was worried about a term, he avoided the conversation altogether. Instead of just calling me and discussing it, and probably fixing the problem, he made some assumptions and negotiated through lawyers. This led to delays, increased costs and distrust. Ultimately, I should have asked him directly how he likes to act and should have set up a process to support his tendencies.
Make sure their incentives are coordinated. When we first discussed prepayment, negotiations were slow, but we made great strides when we structured the deal with a royalty because our incentives were aligned. We both knew that if he succeeded, he would be rewarded. I encourage you to find an offer that is not a zero-sum game.
Legal VS trade talks. As you build the relationship, check to see if you can set the parameters of when to involve the lawyers in a discussion and, more importantly, when not. If we spoke directly to the owner, we were able to negotiate a number of variables together. For example, if the owner demands a higher license fee, I can counter this by offering a shorter term. However, when lawyers were hired to discuss the numbers and terms and conditions, it got more complicated and expensive. Most of the conversations were more about risks than creative solutions.
Agree to speak at least once a week (It doesn’t matter if you have something to discuss or not). By creating a consistent forum to discuss current concerns or issues, you create a relationship based on openness and trust and avoid misunderstandings and misconceptions that can exacerbate. One false assumption ended our business almost at the beginning of the cycle when the seller made an assumption about an action I had taken. Instead of calling me right away, the seller kept it to himself because they tended to avoid conflict. The negotiations slowed down and almost died because they created a feeling of suspicion in his head. Now is the time to set up this recurring weekly meeting.
Sometimes the owner doesn’t even know. You would assume the owner knows all of the legal and other details about your business, but they may not. For example, this owner had some patents owned by his company, some owned by his limited liability company (LLC), and one owned by an individual. It wasn’t dishonest; Little did he realize that he wasn’t doing things consistently as his business grew, which led to my next study and recommendation.
Image: 10,000 hours | Getty Images
The internet is your friend in due diligence. When I found out that some of the patents were owned by the company, I contacted the seller. He told me that he had liquidated his Delaware Corporation the year before. So I went to the Delaware government website, paid $ 20, and found that the company had not legally closed. Again, the owner wasn’t dishonest. I didn’t know, I didn’t know. So be sure to use the internet and any other available connection to confirm the information you get during your due diligence.
Look in the mirror
Know your BATNA (your best alternative to a negotiated solution) in advance. During the negotiations, I didn’t spend much time thinking about what would happen if the deal failed. If I had, I would have realized that my BATNA should rebuild the business itself: create my own brand, product variant, supply chain, etc. But since I didn’t do this beforehand, I spent too much time and money closing the deal. I should have closed the deal myself much earlier.
Don’t get any further. Of course, you’ll need to do your due diligence, but don’t spend time or money preparing to take over the deal before the deal is closed as you can become too emotionally involved and make bad decisions if negotiations stall . Because I had worked so hard to prepare for the business restart, I really wanted the deal to close and started adjusting my terms of the contract against my best business judgment to save it. Do not do that.
Finally, speak or hire an expert. There are consultants and brokers who guide the business buyer through the ups, downs and complexities of business acquisition negotiations. Sometimes they give you very insightful ways in which to structure the business and what due diligence to do, and sometimes they can be similar to a financial advisor and prevent you from making emotional or irrational decisions. Every business is unique so you need to decide whether hiring a broker or advisor is right for you and your business.
After nine months of negotiations, the owner refused to sell me his business. It was a devastating blow. As you can see above, I’ve learned a lot, but not without scars, emotionally and financially. So, if you’re looking to start negotiating a small business purchase, check out my recommendations. Hopefully they will help you avoid the mistakes I made.
… find a deal that is not a zero-sum game.