Strategic Negotiation: Essential Tactics for Deal Success
Negotiation can evoke a range of feelings: some people thrive on it, others dread it, and many fall somewhere in between. Regardless of your stance, the ultimate goal remains the same: to emerge successfully from the negotiation. Mastering effective negotiation methods and tactics can give you an edge where others might falter. The objective is to close deals effectively. Here are three negotiation strategies that have been proven to close more deals.
Leverage the Experts
One common belief is that you should never negotiate your own deal. Business owners are often too emotionally invested in their businesses, which can cloud their judgment. Buyers can also become overly emotionally attached. Engaging a professional business broker or M&A advisor can be a strategic move toward achieving a favorable outcome. A professional broker not only knows what constitutes a fair price but also understands the many factors that influence the negotiation.
Take it or Leave it
Another strategy to consider is the “take it or leave it” approach. In this method, the buyer presents their offer, the seller makes a counter-offer, and then the negotiation ends. The seller maintains their position and hopes for the best. This approach carries risks, as showing some flexibility can often lead to a successful deal. While the “take it or leave it” strategy can be high-risk, it also has the potential for high rewards. An experienced brokerage professional can assess whether this strategy is appropriate based on factors such as the business’s appeal to future buyers.
Addressing Variables
A third approach involves focusing on the most important variables for both the buyer and the seller. Understanding what matters most to both parties can be crucial in crafting a successful deal. It’s important to remember that key issues aren’t always financial; they might include commitments to retaining key employees or allowing a relative to remain involved with the business. Recognizing the complexity of buying a business and addressing these variables can facilitate a smoother negotiation process.
Reaching a Compromise
Finally, consider the strategy of splitting the difference. It’s essential for both buyers and sellers to avoid letting ego derail the deal. Quibbling over minor differences in a multi-million-dollar transaction is usually counterproductive.
Offering to meet halfway between the seller’s asking price and the buyer’s offer—provided the disparity isn’t too large—demonstrates goodwill and flexibility. By proposing to split the difference, you reduce emotional tension and show that you value reaching an agreement.
In dealmaking, don’t be afraid to think creatively. Every business, buyer, and seller is unique, and each deal presents its own challenges. A skilled business broker or M&A advisor will evaluate each situation on its own merits, rather than adhering to a rigid formula.
Copyright: Business Brokerage Press, Inc.
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Why Business Brokerage Professionals Use Term Sheets
Term sheets are invaluable in that they can serve as a point of orientation during negotiations. Thanks to term sheets it is possible to keep everyone involved, focused and on target.
What is a Term Sheet?
These nonbinding agreements detail the basic terms and conditions of a deal. It is different from a legally binding agreement, so it is often misunderstood by buyers and sellers. However, the term sheet serves the purpose of moving a deal along and helping both parties to get on the same page.
A term sheet can be thought of as a preliminary proposal that contains a range of information that is essential to the deal. A well-crafted term sheet includes more than the price, as it also includes key terms and any major considerations, such as employment agreements, consulting and more.
In Russ Robb’s book, “Streetwise Selling Your Business,” Robb concluded that a term sheet serves to include the price range along with the basic structure of a deal. Importantly, Robb also notes that a term sheet will include whether or not any real estate is included in the deal.
There are other ways of thinking about a term sheet. Author and attorney Jean Sifleet once stated that a term sheet should clearly answer the four all-important questions of: Who? Where? What? And, last but not least, How much?
The Importance of Customization
The goal of any negotiation should be to achieve a win-win for everyone involved. In order to achieve that win-win environment, it is helpful to avoid lawyers, accountants and other advisors who overutilize boilerplate documents or who use adversarial tactics or adopt extreme negotiation positions.
Putting it in Writing
Once a verbal agreement has been reached on the important variables of price and terms, it is critical to put that agreement in writing. It is through this information that the process can move on to the next stage and a more formalized letter of intent can be created. It is important to remember that the term sheet is designed to help both parties and can be used to help a deal take its final form.
Term sheets are an extremely useful and time-saving tool. They orient the thinking of all parties involved in the process and help cultivate a clearer understanding of what the final agreement will look like. Through term sheets, it is possible to avoid misunderstandings and last-minute surprises, which often sabotage deals.
Copyright: Business Brokerage Press, Inc.
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Navigating Due Diligence: Essential Steps for Successful Business Transactions
There is no denying the satisfaction that comes with obtaining a signed letter of intent from both the buyer and seller. However, it’s crucial to recognize that due diligence has yet to be completed. No deal is final until the seller undergoes this process and commits to proceeding.
In Stanley Foster Reed’s insightful book, The Art of M&A, Reed emphasizes that the goal of due diligence is to “assess the benefits and liabilities of a proposed acquisition by investigating all relevant aspects of the business’s past, present, and foreseeable future.” Reed highlights the importance of thoroughly examining every aspect of a business and its potential trajectory.
Due diligence is inherently comprehensive, and it’s no surprise that many deals falter during this critical stage. Therefore, it is prudent for both buyers and sellers to consult with key team members, such as lawyers and accountants, before embarking on due diligence.
Reviewing All Aspects of a Business
There are numerous factors that buyers and sellers should consider before initiating due diligence. A checklist addressing these areas is essential. For instance, accounts receivable should be scrutinized to identify outstanding debts. Similarly, inventory should undergo thorough examination.
Environmental concerns, often underestimated by sellers, can derail a deal swiftly. Issues such as lead or asbestos contamination, or water pollution, require careful assessment due to potentially substantial remediation costs and time commitments.
If the business holds trademarks, patents, or copyrights, these valuable assets must be properly documented and their transferability confirmed. They are critical to the business’s current and future value.
The strength of any business lies in its key employees and management. Sellers should evaluate their team for any weaknesses, while buyers must gain a comprehensive understanding of the workforce. Over-reliance on the owner or key personnel can signal risks.
For example, in manufacturing, it is imperative to evaluate all aspects of the production process. The condition of equipment, its anticipated lifespan, efficiency, and overall value are crucial considerations. Identifying key suppliers and assessing their reliability is equally essential.
Due diligence is pivotal for buyers to comprehend the true nature of the business being sold. Sellers can leverage this process to highlight their business’s strengths and address any weaknesses.
Through due diligence, stakeholders can gain insights into critical factors, such as the company’s competitive edge, long-term potential, status of team members, customer and supplier relationships, and more. Business brokers and M&A advisors are well-versed in every facet of due diligence and can guide stakeholders through this complex process.
Copyright: Business Brokerage Press, Inc.
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Debunking 13 of the Biggest Myths About ROBS
Unlock the truth about ROBS. Discover why entrepreneurs are turning to this financing option and dispel common myths
More and more entrepreneurs are using Rollovers for Business Startups — ROBS for short — to fund their dreams. In fact, over half of business owners surveyed in our Small Business Trends studyused ROBS to finance their businesses this year. Yet, it’s surprising how many current and aspiring small business owners believe all the wrong things about ROBS.
In what follows, we’ll dispel many of the biggest myths surrounding ROBS and demystify its complexities — all while clarifying the potential advantages of using ROBS. Let’s get started.
Do you qualify for ROBS? Answer These 5 Questions to see if you qualify now.
Debunking 13 ROBS Myths
Myth 1: ROBS Is a Loan
While loans and ROBS are both financing methods for business needs, ROBS is not a loan. ROBS utilizes your own retirement funds and creates a new retirement plan for your company that all employees can contribute to. If you obtain a loan, you’ll have to pay debt service every month. But because ROBS uses your own funds, you won’t have to pay debt service. It leaves your cash flow clear to be used in the business as you see fit.
Myth 2: ROBS Can’t Be Used with Every Type of Business
ROBS can be used with virtually every type of business and industry. The exception is that the business must be legal on the Federal level. So, for example, you could not fund a marijuana-based business even in states where marijuana is legal because it is not legal on the Federal level.
Myth 3: ROBS Can’t Be Used to Fund a Franchise
This one is totally untrue. ROBS has been used by thousands of franchisees to fund the initial purchase of a franchise, expansion of their franchise holdings and a myriad of business needs on the part of the franchisee. ROBS, unlike other some other forms of financing, can be used flexibly for either a franchise or a stand-alone business.
Myth 4: ROBS Is a Method of Tax Avoidance
ROBS is definitely not tax avoidance. This myth may derive in part from the tax treatment of the retirement funds used. Ordinarily, if you want to withdraw tax-advantaged retirement funds like 401(k)s and traditional Individual Retirement Accounts (IRAs) before the age of 59 1/2, the Internal Revenue Service (IRS) taxes the withdrawn funds and also levies a 10 percent tax penalty for early withdrawal. But ROBS uses a unique structure to withdraw the funds, and the IRS allows qualified funds to be withdrawn without taxation. In addition, the 1974 Congressional enactment of the Employee Retirement Income Securities Act (ERISA), along with key IRS provisions, allows for ROBS to help you grow both your business and your retirement savings at the same time.
Myth 5: ROBS Works for Every Business Entity
To avoid taxation on your retirement funds, ROBS need to be structured according to specific requirements. That means your business must be registered as a C Corporation (C Corp). How does it work? Briefly, a C Corporation is created, along with a new retirement plan for that C Corp. All workers, including you, must have access to that new retirement plan. Your qualified retirement funds are then rolled over into the new retirement plan. You then purchase stock in the new C Corp with the funds in the new retirement plan. After that, the stock can be sold, and the proceeds used to fund the business.
That being said, if you want a C Corp and Limited Liability Company (LLC), you can setup your C Corp to run an LLC.
Learn more about how ROBS works in What is ROBS? How 401(k) Business Financing Works.
Myth 6: Your Investments Aren’t Diversified With ROBS
Diversification is a method of avoiding risk in investments by investing in several asset classes, such as stocks, bonds, and real estate. In fact, ROBS can be viewed as a form of diversified investment; it’s an investment in your business. The myth, though, may rest on the assumption that the retirement funds used for ROBS are all invested in your business, and thus not diversified beyond it. But, of course, you don’t have to use all your retirement funds when you use ROBS. ROBS providers generally require a minimum of $50,000, but your decision on how much to leave in retirement funds and how to much withdraw for ROBs is entirely up to you.
Myth 7: 401(k)s Are the Only Retirement Funds That Can Be Used with ROBS
This myth likely owes its force to the fact that 401(k)s are frequently used for ROBS, to the point where it’s also known as “401(k) business financing.” But many types of tax-advantaged retirement plans can be used, including traditional IRAs and many others. For a complete list, see here.
Myth 8: You Must Quit Your Job to Use ROBS
Many aspiring startup entrepreneurs plan to launch a small business while continuing to work at their current job. Can you do that if you use ROBS? It depends. If you plan to use retirement funds that have nothing to do with your current job (i.e., from a previous job or your own self-directed retirement funds, such as an IRA), quitting your job or not is entirely up to you. However, if you plan to use the retirement funds from your current job, it depends on whether you are vested and on the plan administrator’s rules and regulations about withdrawal.
See Using ROBS to Fund Your Small Business While Employed to learn more.
Myth 9: Absentee business owners can use ROBS
Many rules and regulations govern ROBS, and one of them is that you can’t be an absentee owner.A good rule of thumb is that you must work at your company a minimum of 500 hours in a year.
Myth 10: ROBS Takes Months To Establish
The average time to establish ROBS financing is a month — meaning you can utilize your retirement funds much more quickly than you can funds using other financing methods. But note that other factors figure in the timing as well, such as how quickly you file any business documents required for the C Corp, how quickly your retirement funds are disbursed, and how quickly your state moves on the incorporation for the C Corp. States vary in their speed of processing.
Myth 11: ROBS and Self-Directed IRAs Are the Same
Funds from self-directed IRAs (SDIRAs) can also be used to finance a business. But there are very significant differences between SDIRAs and ROBS. If you finance a business with a SDIRA, you cannot work for the business or draw a salary. With ROBS, by contrast, you must work for the business and you must draw a salary. In addition, SDIRA funds may be subject to the unrelated business income tax (UBIT), while funds used for ROBS are not subject to tax.
Learn more about the differences between ROBS and SDIRAs here.
Myth 12: ROBS May Raise Legal Issues
ROBS is completely legal. Still, it’s advisable to work with an attorney and an experienced ROBS plan administrator to make sure that you are compliant with all requirements and regulations, including those from Federal government agencies such as the IRS and the Department of Labor (DOL), which oversees the new retirement plan.
Myth 13: ROBS Is Extremely Complicated
Frankly, there is some truth to this one. ROBS is regulated by Federal government agencies and must be set up using a specific method and using a particular corporate structure. Administration and paperwork for the DOL must be filed every year. All IRS rules and regulations must be complied with. Most folks aren’t familiar with ROBS before they begin to consider it. That alone could make it seem complicated. Loans are much more familiar to people, who may have applied for loans — for houses, cars or other assets — at some point in the past.
The key is to work with experienced plan administrators and professionals, such as lawyers, to make sure all rules and regulations are followed and that the company is run to follow them in the future.
Advantages of ROBS
The fact is, ROBS has many advantages for current and aspiring small business owners, including:
- ROBS leaves you free of debt service. Plus, you can access your retirement funds early with zero withdrawal fees.
- ROBS can be used for multiple business purposes and in combination with other financing strategies such as SBA Loans.
- ROBS does not require that you have a specific credit score (which business loans do) or that you collateralize your assets such as your house (which business loans can do). Therefore, ROBS is a very good choice if your credit score may preclude a loan or you don’t want (or have) to collateralize a loan.
- ROBS allows you to save for retirement in the new company’s 401(k), which means your retirement savings can grow as your business grows.
- ROBS can be used with multiple funding methods. In fact, many choose to use ROBS as a down payment on a business loan.
The long and short of it is, knowing which ROBS myths are false and what ROBS really is will help you decide if ROBS is the right financing choice for you and your business.
Is ROBS the right investment for you? Find out in Maximizing Your Retirement: ROBS as an Investment.
Guidant Financial: An Experienced ROBS Provider
At Guidant, we’re the experts in ROBS. With over 30,000 successful setups, we’re America’s top choice. We can advise you on whether ROBS is a good choice for your business, explain ROBS in detail, set up ROBS for your business and recommend professionals to assist in the process. Plus, we can help you in the yearly administration of your plan, maintaining compliance and taking the complexity out of ROBS. Contact us today about ROBS as a financing choice.
Call us today at 425-289-3200 for a free, no-pressure business consultation to get started— or pre-qualify in minutes for business financing now!
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Why Should You Buy an Established Business?
A pre-existing business is a proven commodity. A new business, regardless of how great your idea may be, will always have a future that is uncertain. You can hire many consultants and plan meticulously. Yet, even with the best ideas and most experienced consultants, your newly minted business could still quickly fail. A business with a long track record of success provides you with a degree of security and certainty.
It’s also important to note that an existing business has a myriad of established relationships, which are invaluable. Business is all about cultivating strong relationships and developing a positive reputation. An established business will have those relationships set up and ready to go. This can be tremendously beneficial and save you a lot of time and energy.
Whether it is suppliers, customers or key employees and management, this track record can help ensure your success. It will bring with it long-term customers, as well as an established and proven supply chain. Supply chain issues should not be overlooked as a key factor in successfully operating a business. Many new businesses find themselves in ruins over unforeseen supply chain issues. Opting for an established business can help safeguard against an array of potential disruptions.
Another advantage of buying a pre-existing successful business is that it will have a proven cash flow. Statistics¹ show that 82% of businesses fail due to cash flow mismanagement. Even with exceptional ideas, it can take years for a new business to take flight, but an established business should have positive cash flow from day one. No matter how well you plan, there is no way to know with certainty that your new business will generate the revenue you expect it to. An established business can provide proven cash flow, and that is so critical for the success of any business.
Finally, a business is only as strong as the idea and people behind it. An existing business will already have key people in place. You should look for one that has proven and reliable people.
Hiring from scratch is often much harder than it sounds. All too often a resume fails to tell the full story about a potential hire. When you opt for an established business, the previous owner has already vetted key team members for you and they have experience working in the industry and performing a certain role.
Again, new businesses fail way too often. Working with a business broker or M&A advisor and choosing to buy a proven and time-tested existing business will eliminate many headaches. This approach will dramatically boost your overall chances of success and provide you with peace of mind in the process.
Copyright: Business Brokerage Press, Inc.
¹ https://www.score.org/resource/blog-post/1-reason-small-businesses-fail-and-how-avoid-it
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