Exiting a carefully nurtured, successful enterprise is one of the most stressful and challenging business tasks an entrepreneur can undertake. Negotiating the best possible sale price for your ’baby’ is a bit like playing a game of poker, with much to win if you play smart, and plenty to lose if you don’t.
But unlike poker, you can stack the odds in your favour before you even get to the table, according to Dr Stephanie Hussels, Director of the Betany Centre for Entrepreneurship at Cranfield School of Management.
Successful negotiation is all about preparation, she argues, particularly when selling to another business, or to a private equity firm or venture capital investors. Stephanie says: “Doing your prep and knowing exactly what you want from the sale gives you confidence and the emotional and mental strength you need to gain the edge during negotiations.”
“Once you decide to sell you must be 100% certain about your exit plan because a flaky exit strategy will definitely undermine your negotiating game. Be clear from the outset what you want in financial and personal terms – do you want to remain part of the business or walk away completely? Firmly define the 'magic number' you want and what will make you ‘walk away’ – and ensure you stick to it.” (Your St. James's Place Partner can help you define your 'magic number'.)
Timing and support
There can be a long run-up to a sale so keep your cards close to your chest about your intentions, both internally and externally. An ill-timed leak could be destabilising and drive employees to leave, weakening a key asset and reducing the value of the business.
It’s worth appointing external advisers specialising in negotiation to support you in the wider sales process and carry out due diligence and research on buyers. It’s absolutely vital you know beforehand what’s driving buyers, what’s important or unimportant to them, why they want to buy and how these factors align with your objectives.
“This puts you in a position of strength because you can negotiate hard for something you know they want but you’re not bothered about – without letting them know,” explains Stephanie. “You can also use your adviser to strengthen your hand during negotiations, with them taking the hard line and asking difficult questions, leaving you to be more friendly and retain goodwill – a good cop, bad cop approach.”
Leaving for good?
“If you’re planning to fully exit the business, you’ll be looking for a ‘cash-out’ sale. However, selling a business without its ‘rainmaker’ can weaken its value and your buyer may walk away unless you can convince them you’ve a strong management team in place. Offer reassuring facts and figures and involve competent members of your team in the negotiations to build confidence.”
Stephanie recommends taking a role as chairperson or board director before the sale begins, whereby the buyer gets you as part of the business but it will be easier to step aside without the business suffering once the deal has been completed.
Play the ace
“Remaining part of the business usually makes negotiations easier,” Stephanie adds. “The ace you’re holding is you – you’re an intrinsic part of the sale.”
For example, a venture capital or private equity buyer will very likely want you on board as they are unlikely to want to be hands-on and run your business. So, assess your worth to a buyer and negotiate hard.
“You can command a higher price by negotiating a formal ‘earn out’ where you might sit on the board, run a division or look after a specific part of the business for a set period of time as part of the agreement, reassuring the buyer you’re staying.”
Concluding, Stephanie says: “The bottom line is do your prep, understand your buyer, don’t give away anything without trading hard and remember your own value.”
The opinions expressed by third parties are their own and are not necessarily shared by St. James’s Place Wealth Management.
Exit strategies may include the referral to a service that is separate and distinct to those offered by St. James’s Place.