I learned this lesson from one of my professors at business school. It is more complex than it appears, and is worthy of some thought. I would buy virtually any business in the world for $1 million, as long as I can set the terms of the deal.
So, sure, I’ll pay $1 million, but I’ll pay it at a rate of $1 per year for the next million years.
There’s More Involved Than Just the Seller’s Price
I have been involved in a lot of business transactions, and it is rare that the seller is only concerned with getting the highest price. For example, when I bought the recruitment magazine Careers and the MBA from Harvard Business School, my bid was only half that of the highest bid. But the school’s Concessions Board made the unanimous decision to sell to me because I was the low-risk choice—I was more likely to succeed in running the business and operating it in a way that would make the school proud, rather than the higher bidder, who had no school affiliation.
And you can bet that this was exactly what I emphasized in my sales pitch, especially because I was offering only half of one year’s earnings—all I could finance at the time. (A side note: It didn’t hurt that the chair of the board had worked for me one summer during college.)
So some sellers do care what will happen with their business: will you operate it in a way that will make them proud? And most sellers care what will happen to their employees: will you fire the employees and move the operation to another country?
Another key factor is that a lot of sellers want to feel that they got a fair price, if not a good price, for their business. The problem is that the vast majority of small business owners have an inflated idea of what their business is worth.
In dealing with a seller, you are dealing with a human being, and human beings are not rational. The seller has an ego. If the seller feels he or she is being offered less than a fair price for the business, then his or her ego is insulted and it is very hard to close the deal.
So what can you do? Fortunately, when many sellers think of price, they focus overwhelmingly on a particular number, often a very large, overvalued number. “Ten million is what I want,” they might say, for example. But they might be a lot more flexible with the terms of the deal than with changing the face value.
When the seller’s ego is involved, how you treat the seller is very important. It’s not just whether you look the person in the eye and pick up the tab when you take him or her to lunch, but whether you start with an insultingly low offer, or praise the business’s success, or say negative comments in a misguided effort to drive the price down.
Let’s say the seller says $10 million is what it will take. So you structure the terms in such a way so that the effective, rational net present value is closer to what you want to pay. Maybe you say, “I’ll pay five million at closing and then I’ll sign a promissory note to pay you an additional one million a year, each year, for the next five years.”
You would even be better off if part of the payments were future performance–related payoffs. For example, when I sold my book business, I wanted the buyer to increase his final offer. Instead, he countered with agreeing to a bonus if the business hit the performance goals that I had set for the current year.
This is a powerful offer. As the seller, it is hard to say the goals you have set are unrealistic. Yet, even if the goals are realistic, there are many factors that can make the goals unachievable.
Another advantage of delayed payments or payments tied to performance is that it gives the owner an incentive to not compete with you, and even to help you through the sales transition.
If you don’t understand the business you are buying inside out, or if personal relationships with customers is important, I strongly advise you to keep the seller involved with the business in some way, and incentivize him or her with some kind of performance payment or at least a delayed payment plan.
Takeaways You Can Use
- Sellers usually have significant non-price considerations in selecting a buyer for their business.
- The terms matter just as much as the number.
- A win-win may be keeping the seller involved in the business.