Buying a business: 4 questions to ask yourself before negotiating the price
Posted: Tue Dec 10, 2024 9:55 am
What is the biggest mistake a first-time buyer of a business can make? Experienced professionals will tell you: it is putting too much emphasis on getting the lowest possible price.
Too often, novices fail to give enough weight to other equally important factors, which reduces their chances of success. More experienced business owners are willing to compromise on price to ensure the transaction meets other essential criteria that will ensure the success of their acquisition.
Having observed multiple acquisitions over the years – some successful and others unsuccessful – there are four critical questions, in addition to price, that I believe a potential buyer should consider.
1. Will I need help from the previous owner after purchase?
Unless you have a deep understanding of the company's operations, core customer base and industry, you will most likely need the help of the previous owner to successfully make the transition.
This person knows how to manage key customers and important suppliers and what it takes to retain key personnel. They know the threats and new opportunities that are emerging. That is why it is essential to establish a very strong collaborative relationship with them.
This relationship can deteriorate if you focus too much on mom database price during negotiations or are too demanding during the due diligence process. You risk not getting the seller's help during the transition period after the purchase and, more importantly, alienating key staff members.
Even if you negotiated a clause that requires the previous owner to provide you with "after-sales support," it's best to maintain a good relationship from the start, starting with a strong mutual respect.
To avoid any situation that could damage this relationship, a number of business owners entrust the negotiation of the sale and due diligence to an intermediary.
2. How much am I able to invest personally?
How much are you able to invest in the transaction yourself? Your answer will impact the type and size of the company you can buy. For example, if you are thinking of investing $1 million, it is unrealistic to think about buying a $25 million company; a valuation of $5 to $7 million would be more realistic.
The higher the percentage of the sale price that you invest, the more likely lenders will be able to provide you with the resources needed to close the deal. In fact, the more of your own money you invest, the more leeway you will have when negotiating the final price and terms of the sale.
3. What is my tolerance for debt and shared control?
Related to the previous point, another important element to consider is the financing structure. Ask yourself: Are my debts keeping me up at night? How much control of the business am I able to give up? In other words: How much of the total transaction will be secured by my own assets? How much will come from equity financing, vendor financing or mezzanine financing ?
The financing structure will determine how much money you will have available. But most importantly, it should be aligned with the answers to the questions above.
4. What is my vision for the company?
Your vision for the business will be another determining factor, especially in structuring your financing. Are you planning to expand? Upgrade equipment? You absolutely must ensure that you have secured the financing necessary not only to purchase the business, but also to execute your vision. If all of your assets are devoted to the acquisition, you likely won't have the resources to execute your vision.
This is not to say that price is not important. However, potential buyers must be able to compromise on price in order for their purchase to be a success.
Patrick Latour
First Vice President
Discover our solutions
Funding
Loan for business purchase
Working capital loan
Consultation
Develop a strategic plan for your business
Improve your financial management and stay profit
Too often, novices fail to give enough weight to other equally important factors, which reduces their chances of success. More experienced business owners are willing to compromise on price to ensure the transaction meets other essential criteria that will ensure the success of their acquisition.
Having observed multiple acquisitions over the years – some successful and others unsuccessful – there are four critical questions, in addition to price, that I believe a potential buyer should consider.
1. Will I need help from the previous owner after purchase?
Unless you have a deep understanding of the company's operations, core customer base and industry, you will most likely need the help of the previous owner to successfully make the transition.
This person knows how to manage key customers and important suppliers and what it takes to retain key personnel. They know the threats and new opportunities that are emerging. That is why it is essential to establish a very strong collaborative relationship with them.
This relationship can deteriorate if you focus too much on mom database price during negotiations or are too demanding during the due diligence process. You risk not getting the seller's help during the transition period after the purchase and, more importantly, alienating key staff members.
Even if you negotiated a clause that requires the previous owner to provide you with "after-sales support," it's best to maintain a good relationship from the start, starting with a strong mutual respect.
To avoid any situation that could damage this relationship, a number of business owners entrust the negotiation of the sale and due diligence to an intermediary.
2. How much am I able to invest personally?
How much are you able to invest in the transaction yourself? Your answer will impact the type and size of the company you can buy. For example, if you are thinking of investing $1 million, it is unrealistic to think about buying a $25 million company; a valuation of $5 to $7 million would be more realistic.
The higher the percentage of the sale price that you invest, the more likely lenders will be able to provide you with the resources needed to close the deal. In fact, the more of your own money you invest, the more leeway you will have when negotiating the final price and terms of the sale.
3. What is my tolerance for debt and shared control?
Related to the previous point, another important element to consider is the financing structure. Ask yourself: Are my debts keeping me up at night? How much control of the business am I able to give up? In other words: How much of the total transaction will be secured by my own assets? How much will come from equity financing, vendor financing or mezzanine financing ?
The financing structure will determine how much money you will have available. But most importantly, it should be aligned with the answers to the questions above.
4. What is my vision for the company?
Your vision for the business will be another determining factor, especially in structuring your financing. Are you planning to expand? Upgrade equipment? You absolutely must ensure that you have secured the financing necessary not only to purchase the business, but also to execute your vision. If all of your assets are devoted to the acquisition, you likely won't have the resources to execute your vision.
This is not to say that price is not important. However, potential buyers must be able to compromise on price in order for their purchase to be a success.
Patrick Latour
First Vice President
Discover our solutions
Funding
Loan for business purchase
Working capital loan
Consultation
Develop a strategic plan for your business
Improve your financial management and stay profit