Rock LaManna05.30.23
Success in the buy-sell arena starts with understanding how and why a buyer will negotiate – and what they are willing to trade. When preparing to sell your business, you want to negotiate from a position of strength. Any concessions and sacrifices should be made strategically and without surprises. You don’t want to lose traction due to inexperience or lack of skills. You may think your business is so unique the buyer will agree to everything you want, and no compromises will be necessary.
Highly unlikely.
emotional maturity.
Unfortunately, sellers often take it personally when the buyer makes a fair offer. Think about it. Why would a buyer overpay beyond market value, even if the seller has a dream number in mind? Yet a buyer’s offer can throw sellers into defensive mode. Why enter the negotiation at a psychological disadvantage?
As always, preparation is key. Because emotional reactions can kill the deal, we coach sellers to start with a current valuation from an industry expert and then plan for a possible “rook sacrifice.” Before we ever entertain offers from buyers, we want the seller to understand what they are willing to trade or sacrifice to close the deal.
The rook is a high-value piece. You wouldn’t give up a rook to get a pawn. But to trade a rook for a rook – and end up with a better board position or your pieces lined up to immobilize the opponent’s king – it might be worth the sacrifice.
Beginning chess players avoid giving up pieces because they don’t see the big picture. Trading high-value pieces in chess is an advanced tactic and a very powerful one. As a seller, being too focused on price is like being an inexperienced player who refuses to trade pieces. It’s a short-sighted approach, and it will lose the buy-sell game. You can see why it’s imperative to plan what you are and aren’t willing to sacrifice before you start negotiating.
We’ll talk more about the “what” you can trade in a moment. First, I’d like to talk about the “why.”
In each situation, the seller could agree to a less-than-hoped-for package rather than gamble on a better offer that may or may not come through. When time is of the essence, there’s even more motivation to make the current deal work from both sides. From the coaching side, we also know a good match is worth fighting for. Let me repeat that. “A good match is worth fighting for.”
Here are situations where a “rook sacrifice” can become a win-win:
Scenario #1:
During due diligence, the buyer uncovers items in your business they believe warrant a discount in the asking price. Rather than lowering your price, the buyer suggests you sell them your building, which you intended to retain. You counter with a 10-year lease. The buyer agrees but asks you to cover the first year’s overhead expenses to give them a cash cushion to pay the lease. Since you will benefit from the lease for nine additional years, the math pencils out. You structure the final agreement with your advisors to minimize your exposure to risk while incentivizing the buyer to keep expenses low in the year after the sale. The buyer agrees, and you move forward. Win-win.
Scenario #2:
You are being removed from the building you own in an action of eminent domain. There’s a hard deadline to be off the property, so you want the new owner to move the business and equipment to minimize your expense, stress and risk. You prepare an attractive counter-offer, where the buyer will contractually cover your relocation costs should the deal fall through. The buyer now knows you are serious. The buyer agrees to the stipulation and pays the fees for expediting the transaction. Win-win.
Scenario #3
The buyer asks for a price concession to keep the business in the town where it was founded. You agree to the lower price but ask for the employees’ jobs to be protected for a year after the sale. This is a financial decision for the buyer, who has duplication in their ranks. The buyer worries that good employees will leisurely look for better jobs while enjoying the grace period. The buyer says, “We’ll pay more for the company so we don’t have to give an employment guarantee.” You showed you were willing to trade a powerful piece, and the opponent backed off. Win-win.
Scenario #4
The buyer cannot obtain a bank loan to finance the entire deal. Without it, he or she doesn’t have the cash to cover the down payment. You, the seller, agree to assume the risk of financing the unmet portion. In return, the buyer agrees to retain your family members, who are employees, and keep the business name until the loan is paid off. The buyer is motivated to pay off the loan on schedule. Win-win. Do these back-and-forth scenarios sound like a thrilling part of negotiations? They are.
In the buy-sell arena, your advisors will help you decide what’s worth trading and where it’s important to stand your ground. Even the most straightforward transactions have an element of gamesmanship that can be used to your advantage. Almost all successful deals require some level of compromise. Although the rook sacrifice can help keep a deal moving, negotiations begin early in the selling process.
Many buyers will test you by starting with a low offer right off the bat. Unwillingness by the seller to give something to get something is a sign of naivety, which can work against you. Your ability to sacrifice and ask for something of value in return is a positive signal to the buyer. It means you have skin in the game and are serious about the deal.
Here are common mistakes by first-time sellers when they receive an offer lower than they expected:
Rock LaManna is The Deal Flow Guy. He helps qualified buyers and investors find businesses that are ready for acquisition or transition. On the sell side, he helps owners improve their businesses, increase value, and position strategically in anticipation of sale, exit or succession. Sign up for his newsletter at TheDealFlowGuy.com and start the process.
Highly unlikely.
The seller’s role in negotiating
In our decades of work with buyers and sellers, we know what buyers usually ask for in fair concessions from the seller. Your success as a seller depends on handling negotiations with give and take – andemotional maturity.
Unfortunately, sellers often take it personally when the buyer makes a fair offer. Think about it. Why would a buyer overpay beyond market value, even if the seller has a dream number in mind? Yet a buyer’s offer can throw sellers into defensive mode. Why enter the negotiation at a psychological disadvantage?
As always, preparation is key. Because emotional reactions can kill the deal, we coach sellers to start with a current valuation from an industry expert and then plan for a possible “rook sacrifice.” Before we ever entertain offers from buyers, we want the seller to understand what they are willing to trade or sacrifice to close the deal.
What is a “Rook Sacrifice”?
In chess terms, we call it a “rook sacrifice” when you trade two high-value pieces to open up a stalled progression or to maneuver powerfully for the end game.The rook is a high-value piece. You wouldn’t give up a rook to get a pawn. But to trade a rook for a rook – and end up with a better board position or your pieces lined up to immobilize the opponent’s king – it might be worth the sacrifice.
Beginning chess players avoid giving up pieces because they don’t see the big picture. Trading high-value pieces in chess is an advanced tactic and a very powerful one. As a seller, being too focused on price is like being an inexperienced player who refuses to trade pieces. It’s a short-sighted approach, and it will lose the buy-sell game. You can see why it’s imperative to plan what you are and aren’t willing to sacrifice before you start negotiating.
We’ll talk more about the “what” you can trade in a moment. First, I’d like to talk about the “why.”
Why anticipate a low offer... and accept it?
There are many situations where a seller would be willing to make a price concession to complete the deal. The need to close a deal swiftly can happen in the graphic arts industry, with family-owned businesses, and among all types of companies, due to: Death of the owner, serious illness or injury, marital or equity partnerships, divorce, disagreements within the family or among partners, spouse or partner wants to retire, loss of a major customer, formidable competition or other business threats, a serious technology or equipment issue, real estate issue/losing a lease, liquidation workouts, bank or SBA calling the loan, and forced bankruptcy.In each situation, the seller could agree to a less-than-hoped-for package rather than gamble on a better offer that may or may not come through. When time is of the essence, there’s even more motivation to make the current deal work from both sides. From the coaching side, we also know a good match is worth fighting for. Let me repeat that. “A good match is worth fighting for.”
What concessions do buyers ask for?
Now let’s talk about the “what.” What do buyers ask for, and what can you trade in return? In chess, you “cancel out” the point value if you trade a rook for a rook. A rook is worth five pawns, so we say a rook is worth “5.” Counting points in chess is one way to keep track of who’s ahead. It doesn’t always mean someone will be the winner if they have more points – but often, it does. In an end game, you need enough strength to compensate for your lack of pieces. Similarly, you, as the seller, must keep track of your total concessions. Financial value is an easy way to tally the value exchange when trading concessions. Your advisors can educate you on other ways to calculate the give-and-take required in negotiating. When we counsel sellers, we tell them not to give up too much too early, even if they are motivated. There is a cadence to negotiations that comes with practice. Agreeing to a concession smoothly and receiving what you ask for in return is a powerful feeling.
How can sellers counter strategically?
Here are situations where a “rook sacrifice” can become a win-win:Scenario #1:
During due diligence, the buyer uncovers items in your business they believe warrant a discount in the asking price. Rather than lowering your price, the buyer suggests you sell them your building, which you intended to retain. You counter with a 10-year lease. The buyer agrees but asks you to cover the first year’s overhead expenses to give them a cash cushion to pay the lease. Since you will benefit from the lease for nine additional years, the math pencils out. You structure the final agreement with your advisors to minimize your exposure to risk while incentivizing the buyer to keep expenses low in the year after the sale. The buyer agrees, and you move forward. Win-win.
Scenario #2:
You are being removed from the building you own in an action of eminent domain. There’s a hard deadline to be off the property, so you want the new owner to move the business and equipment to minimize your expense, stress and risk. You prepare an attractive counter-offer, where the buyer will contractually cover your relocation costs should the deal fall through. The buyer now knows you are serious. The buyer agrees to the stipulation and pays the fees for expediting the transaction. Win-win.
Scenario #3
The buyer asks for a price concession to keep the business in the town where it was founded. You agree to the lower price but ask for the employees’ jobs to be protected for a year after the sale. This is a financial decision for the buyer, who has duplication in their ranks. The buyer worries that good employees will leisurely look for better jobs while enjoying the grace period. The buyer says, “We’ll pay more for the company so we don’t have to give an employment guarantee.” You showed you were willing to trade a powerful piece, and the opponent backed off. Win-win.
Scenario #4
The buyer cannot obtain a bank loan to finance the entire deal. Without it, he or she doesn’t have the cash to cover the down payment. You, the seller, agree to assume the risk of financing the unmet portion. In return, the buyer agrees to retain your family members, who are employees, and keep the business name until the loan is paid off. The buyer is motivated to pay off the loan on schedule. Win-win. Do these back-and-forth scenarios sound like a thrilling part of negotiations? They are.
Become better selling for the first time
When we educate our clients, we help them become more powerful by understanding where buyers are motivated to sacrifice or “trade pieces.”In the buy-sell arena, your advisors will help you decide what’s worth trading and where it’s important to stand your ground. Even the most straightforward transactions have an element of gamesmanship that can be used to your advantage. Almost all successful deals require some level of compromise. Although the rook sacrifice can help keep a deal moving, negotiations begin early in the selling process.
Many buyers will test you by starting with a low offer right off the bat. Unwillingness by the seller to give something to get something is a sign of naivety, which can work against you. Your ability to sacrifice and ask for something of value in return is a positive signal to the buyer. It means you have skin in the game and are serious about the deal.
Here are common mistakes by first-time sellers when they receive an offer lower than they expected:
- Reacting rashly – Being impulsive shows the buyer your weak points. Instead, take the time to evaluate any offer or counter-offer thoroughly. Make decisions based on the facts, input from your expert team, and your own analysis.
- Taking it personally – Buyers have specific criteria and know which type of transactions will fit their profit model. Being too emotional clouds your judgment and affects your decision-making capabilities.
- Dragging out the process – You’ve heard me say it before: “Time kills all deals.” While it is important to get the best total package for your business, a long back-and-forth process is frustrating and exhausting for all involved. Delays can lead some buyers to walk away. Understand that your ideal buyer may have a window for the transaction. A seller may have one shot at selling this year. If you miss the opportunity, it could take another three years to exit. Where will you be in three more years? How old will you be? Do you want to be living life – or dying in your business? Everything and everyone has an ending.
- Being ignorant – Start with a current valuation from an entity that understands and specializes in the graphic arts industry. Then set your negotiating parameters before putting the business on the market. With your advisors’ input, you can seek and recognize a buyer who’s the right fit.
- Rejecting data from the valuation – Not understanding market conditions and the truth about your business will weaken you as a negotiator. If you have the time and resources to fix problems before you place your business on the market, that’s the best time to do it. Complaining when buyers reject your notion of what your business is worth is an exercise in futility. The price is what the market will bear.
- Forgetting that the buyer will carry on the business – We must remember we’re choosing someone to carry on our legacy. Getting too focused on price means we may overlook other positive attributes of the buyer such as their reputation, the potential impact on the employees, and how your good name will be perceived in the future.
- Rushing into a decision – There’s a reason your advisors want to work everything out with you before your business goes on the market. It’s tempting to get a beefy offer and rush to say yes. You and your team must carefully weigh the pros and cons and review all the paperwork thoroughly. Don’t be ignorant of the many ways you can be taken advantage of in any transaction, let alone one of this significance.
Rock LaManna is The Deal Flow Guy. He helps qualified buyers and investors find businesses that are ready for acquisition or transition. On the sell side, he helps owners improve their businesses, increase value, and position strategically in anticipation of sale, exit or succession. Sign up for his newsletter at TheDealFlowGuy.com and start the process.