Why Is the Negotiation Stage Important?
Negotiating is a way of life for many South Africans. While negotiating is a cross-cultural strategy that plays a significant role in everyone’s daily life, there are nuances and social codes specific to South Africa – a country with diverse cultural DNA.
Negotiating practices will be defined by each unique culture. In the same breath, each culture will define their own negotiating strategies. Whether you are a seller or a buyer, being conscious of and accommodating toward cultural differences during the negotiation process is crucial to ensure collaboration. You may work with someone who’s sole goal is to sign an agreement and move forward. Or you may work with someone who is keen to establish a long-lasting relationship.
Negotiation strategies will always vary depending on the seller or buyer’s characteristics. Some may want to maintain a competitive advantage and be unwilling to compromise unless the negotiation is under threat of deteriorating. Others will see the negotiation journey as a team effort that requires problem-solving, relationship-building, and constant communication.
Nonetheless, a seller will always want the highest price for their business, and a buyer will always want the cheapest option. The negotiation stage is your final hurdle. Your preparation and understanding of goals and contracts will determine the outcome, so have strategies in place to execute this.
Remember that every selling or buying experience is different. Each will have its own circumstances, methods, and specificities, so each negotiation process will be unique. If you feel you may need to retrace some steps, look at our guide on selling a business or our guide on valuing a business. This guide will offer helpful advice, strategies, and examples for sellers and buyers to assist you in the negotiating process.
Negotiating a Business as a Seller
At this point, we will assume that you have completed some prerequisite checklists needed for the negotiation stage. This includes reaching a realistic asking price based on the business’s performance, future development, assets, and industry conditions. This asking price will most likely derive from specific sections of your business. Some examples can include:
- The value of your assets
- A value based on fair market value
- The value of buildings and land you may own
- The value of your shares
We will also assume that you have already formed some form of communication with potential buyers. Having professional assistance like a business broker and a legal adviser specialising in acquisitions is strongly recommended, as they can help you prepare for and navigate the sale.
Preparation is the key to success
Doing your research and formulating a strategy for this final stretch is an obvious step, but it requires clear goals and ways to achieve them. From a seller’s perspective, you probably have ample knowledge around your business’s condition, environment, and future development. But this is the stage that you’ll need to conduct background research on your potential buyer.
Understand what is important to them, including their needs and wants from this process. What are their goals? What would their possible questions and concerns be? Do they have the finances and resources to grow your business? Are they familiar with the terms and conditions? Do they have any requests or preferences? Anticipating possible concerns will put you at an advantage in meetings. Knowing what you and the buyer want from this process will help the negotiation journey run smoothly.
Before your first face-to-face meeting, formulate a clear agenda that will structure the meeting. This should include:
- Answers to possible questions the buyer will ask
- Questions you will ask the buyer
- The location your meeting will take place
- Discussion of contracts (this checklist is at the end of the guide)
- Clear intentions, managing expectations, and goals, including what you are willing to divulge at specific stages
- A flexible timeline outlining follow-up meetings, agendas, and a possible sale date
Trust, honesty, and clear communication
The negotiation process is a very professional and structured arrangement. Ensuring you get the right price for your business is an integral part of this journey, but maintaining a collaborative relationship with your buyer is just as crucial. Mutual trust and honest communication are taken very seriously amongst South Africans. Exhibiting a willingness to nurture a professional relationship that is defined by clear goals and open communication will result in a rewarding outcome for both parties. If a buyer identifies dishonesty or trickery, your relationship is unlikely to last, and any positive dynamics can be ruined. It could even result in legal implications like a court case.
Listen carefully and remain focused, and always summarise meetings to clarify any misunderstandings, especially if you and your buyer may have a language barrier. Be conscious of personal expressions and communications – everyone has different ways of taking risks, understanding time, and building agreements. You will not walk away with everything you wanted – that is what a negotiation is all about.
That being said, do not be a push-over. If you feel that the buyer is biting off more than they can chew, stand your ground. Be assertive, but not aggressive. If you compromise, ensure you get something back in return. Reciprocity will establish clear, professional boundaries.
Cooperate, but know your bottom line
Once you have agreed on a deal, the buyer will begin to conduct due diligence . This is when the buyer and their team will investigate your business before purchasing it. Essentially, this is an opportunity for the buyer to understand and evaluate the assets, rights and risks involved in the purchase, identifying any deal-breakers. This process will progress efficiently if you cooperate with the buyer. Have all the necessary information ready on request, both positive and negative. This can include:
- Financial records
- Legal and regulatory details
- A list of stakeholders
- Asset inventory and property lease
- Reasons you are selling your business
- Research into your market condition
The buyer will want to talk to your employees, so keep your team up to date with this process.
You have a realistic asking price in mind, and you would like to achieve it. However, this price is based on multiple variables, so it is likely to fluctuate throughout the negotiations. Nonetheless, if you have conducted detailed research regarding the value of your business, its market activity and comparable sales, your asking price should be a true reflection of its value. It is crucial to know what your bottom line is and when to walk away. Ensure that you feel comfortable with the deal. Uncertainty is a sign to walk away and reflect on the issues you were faced with.
Find a deal structure that works for you
While the right price is a crucial factor, it should not cause a tunnel vision approach. The buyer should share similar visions, values, cultural understandings, and motivation to keep your business running. Finding the right deal structure will take a lot of creative problem-solving and back-and-forth discussions.
To find a sale agreement that suits you both, be clear about your expectations, the buyer’s financing options and payment terms, agreements and warranties, and transition issues. Remember to summarise these issues for clarification. Inspecting and signing completion documents will be your last step. You can find details of the completion documents further on in the guide.
Negotiating a Business as a Buyer
The process for negotiating a business for sale as a buyer and seller share considerable differences. From a buyer’s perspective, this will likely be a once-in-a-lifetime decision. It is a major purchase, so having a team that specialises in acquisitions is essential. A buyer usually assumes more risk when purchasing a commercial entity, regardless of its size. To prepare for these risks, and possibly mitigate some, seeking support from professionals is wise.
While an advisory team is crucial, having your own comprehensive insight into the business will give you an advantage and demonstrate that you are serious about the purchase. Most importantly, it would be best to show the seller that you are respectful and ready to conduct an equitable negotiation. The negotiation process will be defined by the type of business you want to buy, including what part of the business you wish to acquire.
Prepare and research your target business
To ensure a better experience in your purchasing journey, an understanding of the process and required skills are essential. Educate yourself on the business’s industry, the intricacies of buying a business, how to value a business accurately, and of course, the history and details surrounding the business you are interested in.
How much will you offer for the business? This answer should be based on credible research, and it will differ based on the industry you are buying into. Economic conditions in South Africa can be volatile, so assess the marketplace and use this knowledge of economic conditions to your advantage. Know your financial limitations, including your down payment and any loans you may need to sustain the business post-sale. Always avoid situations of future debt. Through this research, develop your lowest offer and your best offer, ensuring that both are fair, do not undermine the seller, and allow some room for bargaining. When making your offer, consider the following elements:
- Will you require seller financing?
- Will the final sale be subject to the business’s performance?
- Is the existing inventory modern or outdated?
- Will you require the seller to stay on board post-sale? If so, what will their compensation be?
- There are multiple parts to consider here, and that is why a solid advisory team is valuable. Remember that unique circumstances will define the negotiation process, so there will be moments that require improvisation and reflection.
Maintain a relationship built on integrity
A buyer and a seller are equally responsible for maintaining a trustworthy relationship based on honest communication and compromise. While a win-win negotiation is an ideal outcome, it is not always possible. Information sharing is a sign of integrity amongst South Africans. You may want to avoid disclosing too much information to the seller, but if you hide information from someone to try gain an advantage, it could turn a possible partnership into a lengthy conflict.
Putting yourself in the seller’s shoes can help you understand their perspective, and it can help generate sincerity in your interest in the business. Negotiations can be tiring and lengthy, so expressing your intentions for the negotiation upfront will help manage boundaries and expectations. Remember that the seller has probably put a lot of energy, time, and resources into building their business, so treating them with respect will build a solid foundation and create motivation to complete the deal.
However, a buyer usually assumes more risk during a deal, so this respect should be mutual. Stand firm against your decisions and requests, primarily if you identify any deal-breakers. While compromise is important, finding a balance between being accommodating and assertive will be challenging. If you become submissive, the seller and their team can exploit this.
Take due diligence seriously
Devils and angels are in the details. This is a critical step for a buyer, as it will uncover the risks and opportunities of the acquisition. This process should only start once a purchase offer has been made and signed. Due diligence aims to investigate the legal, financial, and commercial position of the business you want to purchase. It should be highly detailed to provide protection and granular insights into the acquisition.
This is your opportunity to identify any problems that need attention.
Some information your advisory team should inspect is:
- Financial records (profits, losses, balance sheets, cash-flows, income tax returns, at least three years of annual reports)
- Assets (premises, equipment, machinery, intellectual property)
- Inventory of assets (quantity and value, depreciation)
- Insurance contracts and lease agreements
- Permits and licenses
- Health and safety practices, adherence to government regulations and industry conditions
- Relationship with clients, vendors, and business partners
- Conditions surrounding the sale (reasons for selling, how long the sale has been on the market)
- Threats, future profitability, and survival
- Industry conditions, trends, and possibilities
Find a suitable deal structure
There is no clear-cut answer for the best deal structure, as the original circumstances of your acquisition will define it. As a buyer, you will want the lowest price possible, calculated from credible research. While you want the negotiation process to be fair, you also want the scales to tip in your favour. A suitable deal structure will take time to evolve, and it will require experience and a clear understanding of your and the seller’s goals and limitations.
Documents and Contracts to Consider in the Negotiation
All professional transactions will involve a lot of legal and financial documentation. The first step is to clarify some purchase offer details – is it an asset purchase or a shares purchase? You should also discuss the offer price and payment terms. This will ultimately dictate future documentation and contracts. Your legal and financial advisors should scrutinise these documents and provide advice before beginning the negotiation process or signing any documentation. You’ll need to clearly define the legal, financial, and commercial structures of the deal. While every transaction will be unique and defined by certain variables, these are typical documentation you should consider:
Your legal team should construct a legally binding confidentiality agreement that should be signed and dated by all parties involved. Of course, you’d want to keep the details and intentions of your sale private and protected.
This document will not be legally binding. It usually outlines the main terms of your deal, covering as many details as possible. This can include your business sector, how long it has been running, all your financial information, details of your staff and their employment contracts, specifications of your premises and building, and other conditions. This agreement should include a comprehensive outline of all the deal terms and is not limited to the examples mentioned above. Your financial and legal team should be closely involved in drawing up this document.
Heads of Terms
To avoid any disputes in the negotiation, your advisory team should draw up a contract that summarises the deal. This document is subject to contract (unless there are confidential issues) and should include price and payment structures, IP, warranties, indemnities, earn-outs, conditions for completion and more. Once again, your advisory team should be involved in this.
Once due diligence has been carried out, and both parties are ready to proceed, ensure all agreements are documented and every detail of the sale is set out in the sale agreement. Your final documents will include everything ranging from tax deeds, indemnity agreements, minutes, transfer documents, service agreements, finance details, warranties, seller and buyer protection, and covenants. Organising and processing these details can be overwhelming and confusing without professional support, so a dedicated financial and legal team will be your guardian angel.
Business Negotiation Tactics
Practice (and research) makes perfect
Negotiating is a skill that is developed through practice. Whether you’re bargaining for a bonus at a local grocery store or bargaining for a million-rand business, take every opportunity you can to practice. Part of this practice includes research concerning your financial requirements and limitations. Preparation is the best negotiation tactic.
Study market trends
A business’s value will always fluctuate according to its industry. This type of knowledge is a valuable negotiation tactic because it can be used as a rebuttal if a seller, for example, is too opportunistic about the future profitability of their business. Your familiarity with market conditions can be used as justification for an offer.
Always summarise to clarify
In a negotiation, you will be required to digest a lot of information, and some might slip through the cracks. After every meeting, summarise the information, send it in an email, file it, and clarify it. This strategy will ensure that both parties are on the same page, literally and figuratively. Although your advisory team will be responsible for all the paperwork, updating yourself on specificities is wise.
Who should issue their proposal first, the seller or the buyer? Should your first offer be strong and assertive, or should it reflect a desire for a mutually beneficial outcome? While this may sound contradictory, this type of binary thinking can be limiting.
South Africans are creative in their problem solving, so this can be a useful tactic to shape your decisions. This can illuminate alternative ways to move forward, find beneficial deals and reduce anxiety and risk.
It’s okay to walk away
Both parties have likely spent a lot of time and energy on this process, which can become tedious and demotivating. However, fatigue and frustration are not as bad as the wrong decision. If you have a bottom line, stick to it. Walking away from a deal that makes you feel uncomfortable, demonstrates too many red flags, or doesn’t align with your goals is more strategic than committing to a decision you will regret.
There are multiple strategies for negotiating a business. Depending on your experience and circumstance, you and your team will assess which tactics will work in your favour.
Business Negotiation Examples
To illustrate the negotiation process very simply, here are some industry-specific examples:
- The seller will start by getting an accurate value of the manufacturing company.
- The seller will vet buyers based on professional and financial conditions
- Initial communication between buyer and seller
- Both parties indicate that they are interested and provide a potential value (this will change)
- The buyer will visit the location, and questions are likely to follow post-visit
- Letter of intent (LOI) is submitted
- Due diligence
- Purchase and Sale Agreement (PSA) will commence
- Closing deal and transition
Retail Business (lease focused)
When negotiating a retail business, , the location and lease will significantly impact its value and define the negotiation process. After all, you cannot have a retail business without the space. Ensure that you have a set budget and non-negotiable requirements. Then:
- Hire someone who specialises in retail mergers and acquisitions, including a lawyer
- Always have a counteroffer to the landlord’s base rent
- Investigate the premises yourself, including its size (the square footage space can often be inflated)
- Negotiate a minimum lease length with as many benefits as possible
- Discuss a time period you can rectify mistakes – in case you breach the lease, for example
- Negotiate on penalty fees (like early termination)
- Consider clauses that will protect you, like a sublease clause or a clause preventing your landlord from allowing competitors to rent in the same area as you
- Negotiate small perks and possible discounts (especially if it is a corporate lease), like free parking, a rent-free fixing period or free employee Wi-Fi
The negotiating stage is complex. There are many considerations, but these can be compartmentalised by hiring a professional team that specialises in industry-specific acquisitions. When it comes to building a relationship with the seller or buyer, South Africans take face-to-face communication seriously to dissolve any disputes. Most business transactions require some form of self-interest, but in South Africa, relationships based on reciprocity and symbiotic dialogue are crucial. It is important to create an environment that serves both the seller’s and buyer’s best interests.
Take advice from experts who can uncover risks and opportunities and help you define your goals and limits. Ensure you have a team that understands all required documentation.
Whether you are a seller or a buyer, the negotiation stage is not a clear-cut journey, so patience and strategy are crucial. For further support and advice, you can contact us.
Remember, step-by-step and respect is the key to success!