Negotiating & Structuring The Deal

This week I want to share the details of the the business for sale that I have been discussing in the last few posts. I think it will help you to formulate some creative ways to structure a deal when buying a business.

As a background, the company is involved in the preparation of documents for various legal matters.

The company does not provide any legal advice whatsoever, nor does it represent people in court. Although these types of services exist somewhat online, it is actually significantly different, and more so in the level of service that clients receive and the detail of the documents that they can have prepared for them. There is no national company, online or “brick and mortar” that offers the extent of services as this company.

What I found incredibly attractive about the business is that the company has developed a very successful advertising approach that combines heavy online and offline activity.

As the business has been rolled out to new markets, its model has worked over and over again.

The good news is that every market they opened has seen very quick results and the business is very profitable.

The recipe has proven successful in close to twenty markets so far.

The bad news is that despite its very effective advertising plan, it requires a five figure investment to launch any new market. The payback is swift, but to grow to all of the key markets is a $500,000 bill.

When I first discussed the business with the owner, he really had two options available. He could continue to grow the business organically and he would likely be able to double his volume over the next five years. Unfortunately, under this scenario, it would be a long time before he would ever get the chance to reap any huge rewards for the business. Or, he could sell the business now and take some “chips off the table” which was his original thinking when I came along.

As we began to talk more, and I was able to validate his business model, it became apparent to me that he truly enjoyed the business. Moreover, he was eager to see it expand.

Although there are no significant barriers to entry in this business – there are thousands of document preparation services, to really create critical mass and scale the business requires significant capital.

Furthermore, the vehicle the company has in place to generate leads is mind-bogglingly successful. Plus, the company is already profitable, and even without any growth it is a nice solid business to own.

The seller wanted a four-times multiple – all cash of course, and he said he would not budge at all.

I have heard that line too many times in my career, so I know it is just posturing. It’s amazing how a business owner begins to see a big payoff when someone approaches them about their business if it is not on the open market. That is why in these cases it is so important to establish a good rapport with the seller, but more important is to be armed with the right knowledge so you can show them the real value, and get them to your way of thinking.

A business buyer can never look at a deal from just their perspective. If you want to negotiate a great deal, all you need to do is dig deeply into the seller’s thinking. When a buyer is able to satisfy the seller’s real “needs and wants”, they can have their way with nearly every seller.

So what did I do? I offered the seller two choices:

Option 1: I agreed to pay his full price, as long as he took my deal terms which included 25% down and a seven year note. He was attracted to the valuation, but not to the terms. He just could not come to grips with only getting twenty-five percent down. That’s okay, it’s only the beginning.

Option 2: I knew the seller was convinced that the business had huge potential. He was also astute enough to know he neither had the acumen or capital to build it to that level. The greatest business deals in the world happen when different parties bring specific need to the table. The seller has tremendous industry know-how and has perfected a system to launch new markets. I can bring the capital to fund the growth and the experience with implementing systems to manage it.

I was not at all worried about learning the business; it would just take a bit of time so I could certainly buy him out, work it for a few months, and then put the plan in place. But, I had another offer for the seller….

I would acquire the entire business but instead of a 25% down payment, I would give him even less – the equivalent of five percent upfront. I would commit to investing all the necessary capital to triple the number of markets within two years, as long as certain milestones were achieved with each market. He would also get a solid employment agreement and a very attractive royalty on revenues.

I showed him that under Option 2, even if the company achieved half of the projected volumes, he would wind up with more than he would on a straight sale under the terms of the first option. Plus, he could remain with the company and be well paid for his ongoing involvement.

It all sounded very good, at least in my mind. The seller could avoid having to invest any money. All the capital needed to grow the business was available. He had tremendous upside if the business delivered what he suggested it could. So in all, I was going to address all of his “wants and needs”…right?

Well, if the seller was not too happy with twenty-five percent down, can you imagine his reaction when I dropped that to five percent?

Next week you will find out exactly what he told me to do with my offer.

Have a great week.


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