Before starting the negotiation process, it is essential to know the other party’s goals. You should also know the person who will make the decision and what your accountant can do to help you reach a fair deal. Here are some tips:
Having a good accountant on your side
Before buying a business, you should always have a good accountant to ensure the financial statements and tax returns are in order. It can help you understand how the business operates. If the business is young, it may not have yet turned a profit. Also, you should know about any debts and liabilities. Old receivables can be challenging to collect. Ask the seller to insure them, and contact their customers directly.
Before buying a business, you should also have a good accountant and business attorney on your team. They will explain the legalities and the transaction structure and represent your interests in the negotiations. Additionally, the seller will usually ask you to sign a confidentiality agreement. This agreement protects the seller from any bad decisions you might make, and you might be tempted to make a wrong decision or overpay without an accountant.
Earnout provisions or commission agreements
The earnout provision is a contingent payment based on certain milestones achieved by the business during the specified period. Such a provision is intended to encourage owner-employee retention. For example, a buyer may include an earnout payment condition in the purchase agreement, contingent on completing specified income-based milestones. The earnout payment conditional on the continued employment of the owners will be tax-deductible.
However, in many cases, the earnout provision is not a standard part of a commission agreement. It is because the seller and buyer’s management teams may have different goals for the business. Despite these concerns, the seller will try to maximize control over the earnout. It can include allowing the buyer to make certain decisions regarding hiring and running the business. Sometimes, the seller will ask the buyer to make financial commitments to finance the earnout. The rationale for this is that this aligns with their interests.
A successful earnout provision may also contain a provision for the seller to continue to work for the new company. This provision should clearly outline the terms of the earnout. For instance, in a merger, a buyer may combine the acquired business’s products and services with the new company’s. A commission agreement based on revenues may be more appropriate. The buyer’s management team may be retained to help manage the company’s operations.
Knowing the decision-maker
Identifying the decision-maker is one of the best ways to maximize your leverage in the negotiations to buy a business. This way, you can avoid being distracted by a potential deal killer. Also, you can avoid spinning your wheels, which can end in a deal-killing failure. The decision-maker will have many other priorities, so you should not be too pushy. Instead, ask questions to learn more about their background, experiences, and hopes.
It can be hard to know who makes the final decision on buying a business but knowing the person responsible for making the decision will help you make an informed decision. You can find out about this person by contacting AnyBusiness.com.au and finding out their title and responsibilities. In the case of SMEs, you may be able to identify the decision-maker quickly enough. However, if you want to buy a business, you may have to work a little more complicated if the company is not publicly traded. The decision-maker will be the CEO or founder. If the company is privately held, you may have to ask former employees and even check the company’s online presence. You can also ask its largest clients to identify the decision-maker.
Knowing the other party’s needs
Knowing the other party’s needs is essential in any deal, but it’s imperative when buying a business with employees. You’ll need to know the company’s management practices and processes and compensation data. Employees’ vacation policies and benefit plans should also be evaluated. Lastly, evaluate inventory and equipment to ensure they can continue to operate effectively and sell for a reasonable price. Consider replacing some furniture for aesthetic reasons, as well.
Knowing the other party’s hopes and fears
Before negotiating with someone, you should know what the other party wants, what they cannot get without it, and who decides whether to make the deal or walk away. Once you know these things, it’s much easier to anticipate the other party’s behaviour at the negotiating table. Knowing the other party’s hopes and fears can help you prepare a better strategy for your business negotiations.