Of all the activities and tactics used in selling a business, whether or not your broker uses them will come down to whether they maximize negotiating leverage. If they don’t, then executing the tactic is really just going through the motions. For example, many sellers believe that a business valuation is a required first step in selling their business. It might be, especially if your business has general appeal to many possible buyers (like a restaurant for example). But if your company has strategic appeal to a limited number of buyers, you might be better off seeing offers before you reveal an asking price.

Nothing requires you to set an asking price and nothing requires you to accept an offer; so you might as well seek as many offers as you can and see what the highest offer is. Or maybe your best option is to reveal an asking price to some buyers and not to others. It all just depends on the situation and the negotiating leverage you can muster from your sales process. But how do you gain negotiation leverage? The answer is that it's done very carefully - there is an art to it. 

Consider that there are 5 levels of negotiating leverage.

1) A buyer benefits from only a portion of the seller’s value

2) A buyer benefits from all seller value

3) A buyer can create synergistic value by owning seller’s business

4) Another buyer can create higher synergistic value than the original buyer

5) Multiple buyers seek synergistic value from the seller’s business

Level 5 leverage is clearly the ideal scenario. These outcomes are not always possible; but knowing what you’re shooting for is an incredibly important step in planning to sell your business. Consider the following scenario and the 5 different levels of negotiating leverage that are possible in a business sale:

The Scenario

You’re a farmer that buys a plow horse for $1,000 and spends $5,000 training the horse to do the 5 tasks you need done on your farm. Then one day you annex the farm next to yours; but you realize that your horse doesn’t have the capacity to plow all of your land plus the annexed land. Getting a second horse would cost another $6,000 but getting a mechanical plow to do the whole job would cost $10,000.

You decide to sell the horse and buy a mechanical plow. You bring in a smart appraiser who says that the fair market value of your horse is $6,000 ($1,000 cost + $5,000 for training). Based on this valuation, you list the horse for sale at $6,000.

Level 1 Leverage – Buyer benefits from only a portion of the seller’s value

A farmer from the next town over shows up to look at your horse. You demonstrate the horse’s skills and the farmer likes the horse; but he offers only $4,000 because the horse can only do 3 of the 5 tasks that he needs done on his farm ($4,000 = $1,000 for the horse + $3,000 for the 3/5 of usable training).

Level 2 Leverage – Buyer benefits from all seller value

While you’re talking to the farmer, a second farmer comes by to see the horse. The horse is exactly what he needs for his farm and he agrees with the valuation; so he offers the full asking price of $6,000. The first farmer, being outbid by this offer, tips his hat and leaves.

Level 3 Leverage – Buyer can create synergistic value by owning seller’s business

While you’re still talking to the second farmer, a man wearing a suit and clearly ‘not from around these parts’ shows up to see the horse. He asks specifically about the horse’s birth certificate. Once he sees the birth certificate, he offers the asking price plus 10%, so $6,600. The second farmer, being outbid by this offer, tips his hat and leaves.

Level 4 Leverage – Another buyer can create higher synergistic value than the original synergistic buyer

While you’re still talking to the man in the suit, a second man in a suit shows up to see the horse. He looks at the birth certificate; he winks at the first man in the suit; and then he hands you a confidential offer for $50,000. The first man in the suit says, “Wait, let me reconsider my offer!” Both men in suits agree to come back the next day.

Level 5 Leverage – Multiple buyers seek synergistic value

That night, you research your horse’s lineage and discover that your horse’s twin brother just won the Kentucky Derby. The men in suits must be in the horse racing business!! Without hesitation, you call every horse racing stable from California to New York and let them know that you are willing to sell the brother of the Kentucky Derby winner. And before the two men in suits come back the next day, you have six offers for your horse ranging from $60,000 to $90,000.

Notice that in the horse metaphor above, each level of leverage is the best you can do unless you find another buyer that can benefit more from owning your business. So, in order to “run a successful sale process,” the seller must discover the highest and best use of his business and require that all buyers submit confidential offers at the same time.

In the story above, if only one man in a suit had shown up, the going price for the horse would have been $6,600. The first man in the suit will never pay for what he can create – in this case a champion horse – unless a second buyer that can create the same thing is present. When the second, third, or fourth buyer shows up, the seller has maximized his negotiating leverage and typically ends up with the most optimal sale outcome.

The moral of the story: 1) Leverage is the key to getting an optimal sales result, and 2) Leverage is based on knowledge and timing. You must find the highest and best use of the company and manage the timing so that every possible buyer is at the proverbial negotiating table at the same time. Otherwise, your leverage is not maximized and the outcome will be suboptimal. If the process is carried out properly, then one of the buyers might open your eyes to a use case for your business that you’ve never before considered. When this happens, the process can be expanded and other similar buyers can be invited to the proverbial negotiating table – at the same time.

So, in conclusion, negotiating leverage comes from the following:

  • finding the highest and best use of your company,
  • finding at least two buyers that can benefit from such use, and
  • bringing these buyers to the negotiating table at the same time.

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