Your approach to the contract negotiation process will depend upon a range of variables, some of which will be beyond your control. The most obvious example of this is the attitude of the buyer who may employ a range of different approaches, and will have priorities and processes which will probably only be partially known to you. Obviously, the buyer’s attitude approach and priorities will have a major effect on how the negotiation proceeds, how far it gets, which contract variables are altered or conceded, and ultimately whether you get a deal at all.
There are several important things to remember when stepping into this process:-
1. BEGIN WITH THE END IN MIND
As the seller, by setting the initial parameters for negotiation, you have some control over where the process begins. Your broker (if you have chosen the broker well), should have been conditioning the buyer, and attempting to set expectations, throughout the purchase introduction process. The broker (and you if there have been face-to-face negotiations), should have given a fairly clear indication of the variables in the contract which are important and/or nonnegotiable. Having said that, most things are negotiable to some degree. Your initial approach and parameters, should be set up to allow some room for negotiation by the buyer, and give a reasonable expectation to the buyer of what you will and won’t accept, whilst at the same time being somewhere near reasonable.
You and your broker should have discussed this, and have a strategy in place.
2. DECIDE WHAT’S IMPORTANT
It is exceedingly rare for the buyer of anything, let alone a business, to step up and immediately agree to every variable of the deal. It is important for you to decide which variables are important and which ones are not.
There are essentially three categories and variables for you to consider:-
- Central and not negotiable
- Central and negotiable
- Throwaways
Central and not negotiable
Examples of this category might be an absolute requirement for a guarantee from a purchase of company, or the requirement for the buyer to obtain a new Lease rather than an assignment of the existing Lease. The purchase of a business with the assignment of an existing Lease renders you liable for rent to the landlord, for the balance of the rental term. If this is a significant amount and you have concerns about this ongoing liability, a requirement for a new Lease will rid you of this liability. Likewise, where you have a purchaser that is a company, and you are uncertain as to its asset base or solvency, a guarantee from the directors (and, these days, the spouse(s) of the director(s)), is really quite essential.
Central but negotiable
The purchase price is the most obvious example of this situation. The amount you receive as the sum of your business, it’s critical for your future, but you can certainly expect the buyer to want to reduce the price. It is quite common for contracts to be received which have several prices crossed out, one after the other, before a final figure was reached.
Throwaways
A good example of this is the restraint clause.
The buyer might well be extremely keen to see you out of the industry for a significant period of time. If you are leaving the industry entirely, and have no plans to return, this is something you might throw away, in exchange for, for example, keeping the purchase price higher. All this will need to be negotiated during the contract completion phase.
3. THE ROLE OF THE BROKER
The broker will earn significant permission on the sale of your business. The brokers role is to find and introduce a buyer who is ready willing and able to complete.
The broker should also be assisting you with:-
- Conditioning the buyer to the important parameters of the deal, upon which you will not compromise;
- Relaying important information to you about the buyer’s priorities and attitudes;
- Manoeuvring the buyer towards a contract which best suits you.
Many people, buyers particularly, make the mistake of assuming or believing that the broker is an unbiased mediator between the parties. This is untrue.
The broker quite literally and legitimately, is your agent, and, if he or she wants a commission, must act in you interests to get a contract together.
The other side of this coin however, is that the broker cannot act in a false or misleading way. The broker is your agent and you will be responsible for any improper conduct undertaken on your behalf. It is not a sustainable approach from either you or the agent, to attempt to hoodwink the buyer into buying business, as, at some stage either before or after settlement, the true facts will become known and you will be held accountable for the acts of your agent.
Having said all of this, an enthusiastic and skilled broker can create appropriate deals where each party “wins”, where, in many other circumstances, a deal will not materialise.
The broker is also a worthwhile circuit breaker between you and the buyer. It is very often extremely worthwhile to be able to deliver information through a third party, and avoid directly having to answer questions on the spot. Having the broker relay information, allows the possibility of time for thinking, and ensures the provision of appropriate information.
The broker is also (or should be), a skilled negotiator, focused solely on the sale deal. Remember, in these circumstances, you will still have the business to run, and this must remain a focus.
4. NEGOTIATION STYLES
The character, personality and approach of the buyer is a major variable in the contract negotiation process.
There is a large number of types of approach and list below is by no means exhaustive.
Some of the styles of negotiation which are often seen are as follows:-
1) Direct clear and simple
2) “Soviet style”
3) “Chinese Style”
4) Pushy
5) Round and round
1) Simple Clear and Direct
This is the buyer who displays a “what you see is what you get” approach. The buyer presents a contract with variables that are somewhere within the bounds of what you consider to be a deal, and is willing to respond to a counter offer that you might make. Responses to your proposals are returned in a timely way and the negotiation proceeds at a reasonable pace. These are the easiest buyers to deal with.
2) Soviet Style
Soviet style negotiation (named for the cold war negotiating style brought to prominence in 60’s and 70’s), opens with assumingly impossibly low offer and then proceeds at snails pace with tiny concessions away form that original position.
An example of this approach would be that if you have indicated a purchase price of, say, 20 with an expectation that you might settle it around 16 or 17, the Soviet style negotiator’s first offer will be 4, and might then proceed very slowly to 5 or 6.
In the face of an extremely low offer, particularly initially, the best options are:-
- a) Withdraw from the negotiations and brand the offer ridiculous;
- b) Refuse to make a counter offer until the serious proposal is put forward
- c) Feign insult and go silent.
3) Chinese Style
This style of negotiation, much applied in South East Asia, involves running a negotiation over long time frames. Each issue dealt with one by one, and, similar to Soviet Style, concessions are small and well spaced apart. This style of negotiator is looking for somebody who is impatient or desperate, and will attempt to make a “big concession” to bring the matter to a close. Patience is the key with this style of negotiation and you must walk the line between keeping the matter going at a reasonable speed, and, at the other extreme, appearing needy or anxious.
The best response to this style of approach is to attempt to meet the size of the concessions being made, with the size of your own concessions, and try to be patient. Making large concessions to attempt to prompt similar large concessions from the buyer, will not work with this type of buyer. This may be frustrating but trying to force the pace will be interpreted as desperation, and you may well end up with deal parameters well below your expectations.
4) Silent approach
Some buyers will make an offer and then go silent.
At Bennett Carroll Solicitors, we’re not just legal experts; we’re your partners in navigating the intricacies of contract negotiation. With offices strategically located in Brisbane, Gold Coast, and the Sunshine Coast, we’re here to ensure your interests are safeguarded every step of the way.
Call us on 1300 334 566 or email info@bcglaw.com.au and safeguard your interests every step of the way- We are your legal problem solvers.
In the ever-evolving landscape of contract negotiation, trust Bennett Carroll Solicitors to be your guiding light.
