How to minimize negotiations when selling your business

What determines the price of a business?

A business’s price is fundamentally determined by its perceived value to a potential buyer, which is often a blend of financial performance, future potential of growth and strategic fit. Key factors include:

• Financial performance: Buyers will meticulously examine historical revenues, profit margins—EBITDA (earnings before interest, taxes, depreciation and amortization) is a common metric—cash flow and asset values. Consistent profitability and strong cash generation make a business more attractive.
• Future growth potential: Buyers are investing in the future. A clear, defensible growth strategy, diversified customer base, scalable operations and identified market opportunities significantly boost value.
• Industry and market conditions: The health of your industry, market trends, competitive landscape and economic forecasts all play a role. A business in a growing, stable industry will command a higher multiple.
• Transferability: How easily can the business operate without the current owner? Strong management teams, documented processes, and clear systems increase value.
• Assets: The quality and condition of tangible assets (equipment, real estate, inventory) and intangible assets (brand reputation, patents, customer lists, unique intellectual property) contribute to the valuation.
• Risk profile: Buyers assess all potential risks, from customer concentration and key employee reliance to regulatory exposure and operational inefficiencies. Lower perceived risk typically equates to higher value.

How to put a value on your business

To accurately determine your business's value, it’s important to engage a Chartered Business Valuator (CBV) to get a realistic market-perceived price. These professionals provide an independent assessment, typically using methods like:

• Discounted cash flow: This approach estimates a business's value by projecting its future cash flows and then discounting them back to their present value using a suitable discount rate. It entails forecasting earnings, capital expenditures and working capital to arrive at a stream of free cash flow.
• Asset-based valuation: A method that determines a business's value by summing the fair market value of its tangible and intangible assets, then subtracting its liabilities. It involves a detailed assessment of all assets, including real estate, equipment, inventory and intellectual property.
• Market multiples: This technique values a business by comparing it to similar companies that have recently been sold or are publicly traded. It includes applying valuation ratios (multiples) derived from comparable transactions or public market data to the subject company's financial metrics, such as revenue or EBITDA.

Their report provides a credible baseline, helping you understand your business's worth and providing leverage in discussions with potential buyers. This helps reduce the likelihood of tense negotiations over price.

How much room is there for negotiation?

The "spread" between initial offer and final sale price, is often narrower and more predictable when the seller is well-prepared. Ideally, your comprehensive preparation minimizes surprises. Significant price adjustments typically occur during the buyer's due diligence period. These adjustments are usually based on factors such as:

• Undisclosed liabilities: Hidden debts, environmental issues or pending lawsuits.
• Asset condition: Deterioration of equipment, building defects or inventory discrepancies that impact future operating costs.
• Working capital adjustments: Ensuring the business has sufficient cash and current assets at closing to operate without immediate infusions from the buyer.
• Customer concentration: Discovery of a higher reliance on a few key customers than initially presented.
• Operational inefficiencies: Realization that achieving stated profitability will require more significant investment or effort than anticipated.

“A potential buyer will see what they’ll have to spend on the business, whether that’s a leaking roof or defective equipment. Anything not up to par is an opportunity for a buyer to start creeping down the price,” says Hagarty.

When all elements of the sale are thoroughly understood and managed before a buyer expresses serious interest, the negotiation becomes less about large price swings and more about fine-tuning the deal based on confirmed realities.

At what stage does negotiation take place?

Negotiation over the sale price typically occurs in several stages, evolving in detail and intensity.

Initial offer/letter of intent (LOI) stage

After initial marketing and buyer interest, a serious buyer submits an LOI. This is a non-binding offer outlining the proposed purchase price, key terms and the exclusivity period for due diligence (usually 30-45 days).

The negotiation at this stage focuses on the headline price range, general deal structure (asset vs. share sale, deal financing plan) and the framework for due diligence.

Due diligence period

Following the acceptance of an LOI, the buyer and their legal counsel, operational experts, environmental consultants and accountant conduct a deep dive into the seller's finance, legal, operational and HR functions. The seller will have M&A specialists, a lawyer, accounting firm and sometimes a tax specialist throughout the process to answer questions and provide advice.

This is where the most significant adjustments to the purchase price often happen. Buyers present findings that impact their valuation, leading to price chips or adjustments to deal terms (e.g., holdbacks, funds in trust) to mitigate newly discovered risks or discrepancies.

“The price between a first offer and due diligence may be lower but if the seller has been transparent throughout the stages leading to the final offer, there should be little difference between the ask and the offer,” says Hagarty.

“If you need to negotiate a lot, you’re not seeing eye to eye on the main issue.”

Definitive purchase agreement drafting

When due diligence is substantially complete, the legal teams draft the binding purchase agreement. This is when the focus shifts to representations and warranties, indemnities, closing conditions, post-closing adjustments and other legal protections. While the main price may be settled, these clauses can significantly impact the net value the seller receives.

At this stage, or during due diligence, the financing structure of the sale will be finalized. Some buyers want milestone payments based on company performance if the selling business’s growth plan isn’t mature enough yet.

What is the buyer thinking?

During due diligence, the buyer is focused on validating assumptions and uncovering risks. They are thinking:

• Is this business really what it appeared to be?
• What hidden costs or liabilities will I inherit?
• What investments will I need to make after the purchase to maintain or improve performance?
• How much working capital will this business actually require post-closing?
• How reliant is the business on the seller's continued involvement?
• Are there any red flags that impact my ability to integrate or grow the business as planned?

Effective sellers anticipate these concerns. By having pristine records, documented processes, a strong team and proactively addressing issues before due diligence, you minimize reasons for price reductions.

To truly maximize your sale price and simplify negotiation, a proactive, multi-year preparation strategy is essential. Aim for three to five years to strengthen your business and work toward the goal of the sale. The average industry’s time to complete a successful transition is estimated at 3.5 years. The transaction itself will require between 6-12 months.

“Get your operations, finances, leadership and HR in order to maximize return and achieve a smooth transaction. This is how you can move away form the mid-point of the range of the business value estimated by your expert and start earning stronger business multiples,” says Hagarty.

“If the buyer sees a strong company with strong assets and not much to fix, your business is worth the value you’re asking.”

Next step:

Minimize negotiations and maximize value by downloading BDC’s free Checklist to prepare your business for sale