Pavel K. - business partner of Ilya Z. (real names were changed to preserve the client's confidentiality) drove him home from the airport. “I'm sorry your trip didn't go well,” he said sympathetically.

Ilya brushed aside a tear and nodded his head in agreement. He wanted to buy a business to get a green card, but it all ended sadly.

One of the main problems in negotiations

During negotiations, the main reason for disagreement is that the parties don`t hear each other. Everyone focuses only on their own goals. As a result of the position that only one's own interests are important, potentially profitable deals fall apart and the chance for a win-win compromise is missed. Moreover, new problems emerge.

Why doesn't a person hear the other side? We understand that in the process of buying a business, you need to take control of a large number of variables. And you think that the desire of the other side will not create big problems. Unfortunately, this is not so.

But like any problem, there is a solution. To conduct successful negotiations, you need to learn to put yourself in the shoes of the other person and understand exactly what they want to achieve. And this “achievement” is often more than just cashing in assets.

To make it easier for you to understand, let's illustrate this idea with a hypothetical example.

Imagine a situation where a business owner wants $800,000, but you are not ready to pay that amount right away. The first thing you can do is show that you understand the seller's goals. Older people want to get a raise in their pension by selling their business. The most traditional reaction in such a situation is that the buyer wants to lower the price. Alternatively, we tell them: "We understand how important every dollar is to you because it will go to your retirement fund." With this phrase, we demonstrate an understanding of the seller's goals. You say: “We are ready to pay you $600 thousand at once, and $200 thousand within three years. As a result, you will receive the entire amount. Moreover, we want to add that you will receive interest on the remaining $200 thousand for 3 years. In reality, you will receive more than the requested nominal amount of the sale.”

Another consideration: “We want the transfer of businesses to be smooth and painless, so we invite you to become our manager. In this case, you will receive a salary, which will further increase the amount of money that you can contribute to your pension fund.”

Payment by installments reduces the tax that you pay after the sale of the business.

When you think about the goals of the other side, you think about your perspective. By finding the right approach to the person, you increase the profitability of the deal for both parties.

You can learn how to be successful in negotiations in the sale and purchase of a business from our classes. 

Learn how to improve your negotiating position here. Also, learn about manipulation during negotiations, so as not to fall for them. And of course, make sure that a broker will be present during negotiations with you.

What you need to do to conduct successful negotiations

  • It is easier to negotiate with the other party when they feel heard and understood, which increases the likelihood of striking a deal.
  • Establish trust before negotiating.
  • Make compromises more workable

Takeaway: Understanding the seller's goals allows you to formulate a profitable offer for you so that it sounds profitable for the seller as well.

An example of profitability, taking into account installments and the specifics of the enterprise

Цели продавца бизнеса 3

Asking Price - $800,000

Declared Profit - $200,000

Declared yield 25%

Deal structure:

$600,000 initial payment

$200,000 - installment plan for three years at 6% per annum

$6,084.39 - monthly payment

$73,012.65 - annual installment payment

$200,000 - accounts receivable

$120,000 - payable

$80,000 - replenishment of working capital after purchase (difference between accounts receivable and payable)

First Year Cash Flow = $46.987.35 ($200,000 - $80,000 - $73,012.65)

First Year ROI = 8% ($46.987.35 / $600,000)

Cash flow over the next two years = $126,987.35 ($200,000 - $73,012.65)

ROI for the next 2 years = 21% ($126,987.35 / $600,000)

Starting from the 4th year, the yield is 33%. ($200,000 / $600,000)

Thus, an enterprise whose real value

$880,000 ($800,000 + $80,000)

and real ROI = 22% ($200,000 / $880,000),

was purchased for $600,000. The profitability of the first year is significantly lower than the declared one (8%). In the second and third years - approximately equal to the declared one and starting from the 4th year - by a third higher than the declared one.

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