Buying a business - The dos and don'ts of negotiating the purchase

Very few businesses sell for the asking price. Here are some handy tips to help you negotiate price and terms that will satisfy both you and the vendor.

The DOs of negotiation:

  • Do gain the vendor’s confidence and trust by entering into a confidentiality agreement and offering to provide a personal resume.
  • Do find out why the vendor is selling.
  • Do obtain approval from the vendor to obtain information through their accountant to help your relationship remain neutral and objective.
  • Do maintain a positive approach towards the current operation of the business to avoid antagonising the vendor with what they may see as criticism.
  • Do make your offer carefully and with the assistance of your professional advisers.
  • Do be prepared for negotiation to be a process rather than a one-off event.

The DON’Ts of negotiation:

  • Don’t view the purchase in emotional terms — stay objective.
  • Don’t look at the opportunities of owning the business without considering the problems.
  • Don’t accept the vendor’s representations at face value. Be cautious and verify sales and other important data.
  • Don’t think that a problem business can easily be turned around. It takes money, energy and time.
  • Don’t use all of your available cash for the purchase.  Leave some cash reserves and credit lines for working capital and contingencies.
  • Don’t create conflict with the vendor during negotiations.
  • Don’t be afraid to seek concessions in price or terms.

When you’re contemplating buying a business be cautious of any ideas you may have to change the business too quickly as customers may not like the changes and could respond negatively. In deciding the viability of the business you should also be cautious about assuming that major customers will remain after you buy the business.

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