Business Negotiations

Economics says that you trade money for goods or services that are more valuable to you than the seller. For example, I spend money on prepared food because solving my hunger is worth more to me than the money I trade for it. This is a simplified explanation, obviously, but it’s the same concept when buying or selling a business.

When purchasing a company, a partner at a private equity firm remarked:

“It’s easy to negotiate when you buy with a large spread.”

Meaning that he sees something of worth in your company that you don’t. He’s buying a company not because he plans to keep the company at current revenues, but because he sees the company making 5 or 10 times the company’s current sales. He is, in essence, buying the future revenue of the company. That promise of a large spread is worth more to the buyer than it is to the merchant, who may only see the operating costs of his current venture.

When the seller can’t see that large spread, it makes the buyer’s negotiations easier. Because the buyer doesn’t have to get caught up in the little details that might delay or ruin a transaction. If the seller wants twice what you offer and you know the business can make 250 percent of that, don’t negotiate back and forth with the seller on small points. So what if the CEO wants to keep his desk and a company car? It makes little difference in the long run. Similarly, if the buyer wants something small from you to complete a deal, give it to them. Sell your business and move on. Don’t make negotiations more difficult than they need to be.

How do you grow your own business so that you can see the large spread that the private equity partner sees in your company?