WES S01E05: Negotiating The Deal
Trying to negotiate a deal from either the buy or sell side can be one of the most exciting, exhausting, and rewarding parts of closing the deal on a an online business purchase.
Having closed more than $10M in deals combined, we’ve definitely had our fair share of breathtaking wins and devastating losses here.
We’ll be covering some of our experiences in this episode and walking you through the pre-negotiation steps, discussing points of negotiation you might not have even considered, and then finally sharing some of our best negotiating tips and tactics to get a win-win deal for all parties.
If you’re looking to hear some real-world experiences when it comes to negotiating online business purchases, this is the episode for you – hope you enjoy!
Listen To The Full Interview:
What You’ll Learn From This Episode:
- Pre-Negotiation – Break out your Critical Vs. Non-Critical points
- Points of Negotiation – Total Sales Price, Seller Financing, Stock Vs. Asset Sale
- Negotiation Tips – Find out what the buyer/seller wants out of the deal
Featured On The Show:
- @WTjern from FBA Expert
- @PiPwebsite from Passion Into Paychecks
- @OfficialTung from Cloud Living
- @AndrewEydt from Producracy
Ace Chapman: Whether it’s the price for the other terms of the deal, everything in this world is negotiable.
Speaker 2: Buying and selling businesses just got a lot easier. Welcome to the Web Equity show, where thousands of successful entrepreneurs go to learn about buying, growing, and selling online businesses. Your hosts Justin Cook and Ace Chapman, share their real life advice, examples and expert interviews, to help you build and grow your own online portfolio. Now to your hosts, Justin and Ace.
Justin Cook: We are back, I’m Justin Cook, I’m your host of the Web Equity show. I’m here with Ace Chapman, my partner extraordinaire on the show, what’s going on buddy?
Ace Chapman: Not much man, I’m excited to jump into the episode today.
Justin Cook: Yeah man we’re talking about negotiating a deal. So we’re gonna talk about pre-negotiations, what you need to have in mind. We’re going to talk about points of negotiation, things that you might not have considered, and how to negotiate. Whether you’re coming from the buy or the sell side. We’ve got a lot to cover. Before we do that buddy, let’s do some listener love. We’ve got our first 5 star Itunes review man.
Ace Chapman: First one, this is a big milestone.
Justin Cook: You like that, this is your first podcast review ever, and it is 5 stars. It’s from Matthew H. he says, “extremely insightful, absolutely love it. Ace and Justin knock another one out of the park, great advice and information for anyone wanting to learn more about buying businesses online or off, keep up the good work gentleman”. Well thanks Matt appreciate it.
We also got a couple of mentions on twitter, we had Will Tegerlin said, “already cruised through the first 3 episodes this morning, I’m looking to sell in December”. Great Will, do reach out to us if you have any questions we’d love to get those answered, and maybe even put you on the show.
Got another one from Josh Showgrin who said, “I’m loving the show my man, will be following for sure, keep it up”. Couple of mentions, you know Tong Tran he said, “congrats on the launch guys”. And our buddy Matt Paulson said, “check out our brand new podcast”. He gave us a retweet along with Andrew Ite said, “subscribed I’ll get into these tonight”. So thanks guys so much for listening to the show, glad you appreciate it.
Alright man let’s get right into this show.
Today we’re talking about negotiating the deal, which can be the most interesting and possibly the most stressful part of actually getting a deal done. It is something that Ace and I both enjoy, and get really stressed out about when we’re doing it for our clients and for ourselves.
Ace Chapman: Yeah it’s funny, everybody really focuses on do diligence and getting a really good deal there. And to the end of that, and you’re starting to negotiate what the terms of and, what we’re talking about that whole post do diligence aspect of the deal.
Justin Cook: Yeah, it’s funny because, you could do do diligence and you’re saying oh this site is great, it’s fantastic fit for me. And then all of a sudden that deal can go to crap in negotiations. Like what was an amazing deal, turns out to be not so good and it’s something you should walk away from. And I think that’s why negotiations are really important.
Ace Chapman: Yeah, sometimes you may have a sticking point in the deal, and it’s something that’s really important to you, that the seller isn’t willing to budge on. Or it’s just something that isn’t crucial to them, and they’re wanting to go to another potential buyer.
Justin Cook: Yeah I think ultimately, you’re looking for a balance between, what you need to make it work, what the other party needs to make it work, and what you both actually want out of the deal. And this is cheesy a bit, but you are looking for that kind of win-win scenario. And we’re gonna talk about this a bit more, but trying to find out what is a win for them, is gonna give you some leverage and give you some opportunity to actually make a deal that works for you as well.
Ace Chapman: And I know Justin, talking to people. People have this vision, I think it’s maybe from Wall Street movies or, just seeing other huge titans and how they [inaudible 00:03:43] people in business. But a lot of times, people that think effort to negotiate that win-win has to be this big orchestrated, kind of tyrant coming in, and making demands and that kinda thing. And the truth is, in most cases, the old saying that it takes honey to attract bee’s, you can be really nice to the person and still get what you want. And be that likable negotiator.
Justin Cook: It’s funny, we recently had a client is selling a site, and he was gonna do both a seller interview with me, and then he was gonna get on the phone with you. I think it was yesterday,
Ace Chapman: Yeah.
Justin Cook: And he was a little nervous about it so. So he was chatting with us about it and I said look, if you’re gonna be getting on the phone with anybody, like Ace is like the nicest guy on Earth, he’s great. He’s gonna make it really smooth, he’s a professional. And I was like if anyone, if you’re gonna do your first call with a potential buyer, like he’s the absolute best one to do it with. And I think there’s some value, you provide some value there where, you’re really likable, right? So people, get on the phone with you and they’re like, “ah he’s a cool guy, he’s really nice”, and I think it’s disarming to some degree and I think it really helps you, in your negotiations.
Ace Chapman: Well I have been on the phone before, and come to an agreement even, and had people tell me, I remember one case actually it was a deal that we were doing together and they were like, “well we realize that you’re getting over on us in some way, we don’t know what it is, but we know that there’s something hidden in this”, and it’s like no it’s not at all. But it is funny, I think sometimes people just feel like, okay if you have the reputation as a good negotiator, that there’s some trickery involved, or some kind of aggressive nature and that’s not the case at all.
Justin Cook: That sucks man your reputation is proceeding you. You’re causing yourself some issues there. All right buddy, so we got 3 sections we’re gonna get into. The first section is the pre-negotiations, so this is before you sit down at the table and get the deal done. Then we’re gonna talk the different or the various points of negotiation when you’re buying a website, or a business. There’s a bunch of things, some of them are pretty obvious, obviously price and that kinda thing. Some of them are not so obvious, we want to cover that. And then we’re gonna get into finally some negotiation tips, when you’re at the table, what you can use as leverage, how can you find the sweet spots, person across the table and that kinda things, so.
To start man in the pre-negotiation, I think a really good plan is to break out your critical versus non-critical points. So there are some pieces in the negotiation, which we’re gonna get into in the second part, that are critical to you, like you won’t do the deal unless this happens. And don’t lump a bunch in there, like make sure that they’re really just the points that you can’t budge on, or won’t budge on and then everything else is negotiable. So you have everything else on the different side, the other side of piece of paper. So you kind of have a grasp going into it, what’s most important and what’s not.
Ace Chapman: Yeah, one of the things that even in kind of pre-deal, I like to walk through with clients is, envisioning the deal that you want, and then coming up with the characteristics, and kind of the critical points of what you want in the deal, even before you get to the deal that you’re gonna make an offer on. Because once you start to look at that offer, sometimes you can start to think things are really important to you, that at the end of the day just aren’t, and so. Kinda I think that’s a great idea, and even before that, getting some clarity on what your expectations are for the type of deal, and the terms that you’re gonna be happy with, so that you don’t get caught up in the emotions of negotiations and start fighting for things at the end of the day aren’t critical to your goals.
Justin Cook: Yeah I’ve seen that, where you get to the table, like I been that guy. Where you get to table and you start arguing for things that weren’t really in the initial blueprint. They weren’t that important to you before, but all of sudden when you’re like in seating points, then you’re like, “well I wanna take a look back”, it’s almost like divorce court or something right? Where you’re like battling for this and no that’s my chair or whatever. Maybe not quite that bad, but there are points that become important to you in the heat of battle, that maybe weren’t as important to you before. So yeah I agree, that if you can have those kind of like, scoped out before hand that’s beneficial.
Ace Chapman: Yeah, and I think the connection with the divorce court thing, is that there’s a lot of ego involved, it’s not this logical thing, and so. One of the things I recommend is once you do get past that point, and you found the deal, you want to write out some scenarios, what are the different possibilities, because it’s not even to say that there is one set deal structure that’s the perfect deal structure, and it happened to be the first one that you decided that you wanted. So people can decide what they want, even if the seller comes back with another suggestion, they’re totally closed off because they feel like, no this is the deal that I want. So one of the ways to get around that, is just to come up with several scenarios, so there, even if the seller comes back with something that you’re not agreeable with, you can go back to them and show them hey I’m willing to be a little flexible I’m not, the oak tree that’s stuck in exactly the position I am in, and have no flexibility.
Justin Cook: Yeah, that’s interesting, so maybe you’re willing to do, yeah like you write down a few scenarios, I’m willing to do 90% cash up front. I’m willing to do 70% cash upfront, you know 25% over the 6 months, and you have all these like different scenarios, written out, so that if negotiations stall or something you can come back to those and mention them. Saying look this is something I might be able to do, this is something I might be able to do … and it might like kinda spur something in the other party that [inaudible 00:09:14] the seller or buyer that they hadn’t planned on right?
I think that, it’s okay to be strict in pre-negotiation when you’re by yourself, when you’re saying okay here are the critical or here are the non-critical points. When you’re writing out your scenarios, but I think you need to back off that when you go to the negotiating table. You want to really open that up, and in fact I really argue that, you don’t want to dismiss, discount, or commit to anything at the negotiation table. So you’re not gonna say okay it’s a deal, it’s always gonna be okay that sounds great, you leave it really positive, you bring up some other alternatives, and then you’re gonna have to go back, step away from the deal, make sure that it matches kind of your expectations, that it’s something that you want to go for with, and then come back and get the deal done.
Ace Chapman: Yeah, and I think it’s about taking that why. Sometimes a seller will come up with, and we we’re involved in the deal here, towards to end of last year where we were negotiating with a seller, he had some financial things going on where, he had owed the government some money and some things. So he felt like the only way to structure the deal to get done what he needed done, was to get all of this cash up front. Well once we realized, okay his real motivation is because of this, we were able to come up with a solution, kind of that cost us a lot less money then solved his problem because we knew what the motivation was. So you also don’t want to commit to something, because it may not even be something that the seller really needs, until you find out the why behind what they’re saying that they need.
The other why that you wanna kinda communicate with them, is why you’re the best possible buyer for their business. Sometimes you get these sellers that have an emotional attachment to their business, they want to see it thrive. I’ve sold businesses that it broke my heart that the seller came in and tried to do things a totally different way and everything was working in the business and they end up killing it. And that just sucks as an entrepreneur, to see something you poured your time, and effort and energy into, disappear off the face of the Earth. And so when you can communicate with the seller, that you’ve got a plan, you’ve got something that’s gonna continue their legacy and take it to a whole other level. That can be a huge selling point for the seller.
Justin Cook: Absolutely, there are other things too right? So if you’re a buyer that you have cash in hand, that’s an advantage right? So if you have all these advantages, come in with that, and use that as kind of leverage right? You’re selling the other person that you’re the best person to do business with. If your site has, is a great fit for them and you know it, you could like layout the reason, as a seller, you can layout the reasons why it’s great for them, if you are motivated to train them because it is your baby and you want to make sure that it goes far, mention that as a seller. You’re selling them on why they should take it, but you’re also selling them on why you’re the best person for them to work with, and you want them to feel warm and fuzzy walking away from the table.
Ace Chapman: Absolutely.
Justin Cook: All right buddy, let’s go over some points in negotiations, what I’m gonna do is, I’m just gonna mention them and kinda get your thoughts on how to negotiate, why it’s a point of interest, when you negotiate on it, that kind of thing. So first it’s pretty clear man, duh, total sales price. So you can negotiate on the total sales price and give me your thoughts on that.
Ace Chapman: Yeah, I think unfortunately because in every other area of our life, everything is focused on price, and from a consumers perspective, price is crucial. That’s gonna be, kind of the basis of your cost for something, in addition to interest or taxes that are associated in all of that. So when it comes to buying a business, people naturally want to focus on what’s the price of this deal, and how can I get it at a lower price, and I want a discount and I don’t wanna pay the sticker price, blah blah blah. The truth is price just doesn’t matter in this space, and I had a huge shift for me, with a guy that was in private equity, that was one of my mentors. And it was a weird thing for me to think about, but he would kind of remind me, if I could get a billion dollar company and have to pay two billion dollars for it, but controlled the other deal points or terms of the deal, I’ll take that deal all day long, because I’m gonna pay half a million down and 50,000 a month for the next thousand years, and get this amazing cash flow.
So when you’re doing these deals what you want to focus on, isn’t the price, it’s the ROI of the deal. Is this making me the money I want to make, and that kind of thing. What we’re buying is return on investment, we’re not trying to get a lower price on a car.
Justin Cook: Yeah it sounds like you’re trying to hustle me Ace, you know what I mean, it sounds like you’re trying to, “oh don’t look at the price, look at the monthly payment”, right, you sound like that car selling guy. But I get what you’re saying, and you’re mentioning it on both the buy and the sell side, and that’s true, right. It’s true on both sides of the table. That total price is not always the biggest concern. And I wonder how many people we’ve had, look at sites for sale or whatever, and they’re like okay $200,000 I can’t afford that, moving on. When if it would’ve been list like … maybe if we would’ve laid out scenarios, like $50,000 down, $100,000 financed, whatever, they’d had different scenarios, they’d been like oh I can afford that, right? But they see the sticker price and they’re like nope I can’t do it, and they lose it just looking at the price tag.
Ace Chapman: Yeah, yeah absolutely, and so that’s important to realize is that whether it’s the price or the other terms of the deal, everything in this world is negotiable. It’s funny you know this Justin traveling around the world but in America we’re not used to negotiating every aspect of our life. I mean, you go outside of the U.S. and everything is negotiable, and you go to the market all of your groceries, everything that you buy you can negotiate it, people in other cultures are used to that. For us, we’re used to, if I can’t afford it, I just don’t buy it, there’s no other option. So price is definitely negotiable.
Justin Cook: You want to go [inaudible 00:15:14] market in Saigon and you’ll get a Master’s course in negotiating like three dollar items. Yeah man.
Ace Chapman: Yeah.
Justin Cook: Yeah they’re pretty good at that. Yeah I think sales price is an interesting one. Let’s talk about the second one which is seller financing, I know you like to work your deals here, and then there’s a whole bunch of different ways. When I’m talking about seller financing I mean, they could actually do a loan, they could do a rate or no rate. Sometimes you get interest free loans from the sellers. It might include earn out, is based on some kind of percentage of the profit of the revenue.
Ace Chapman: Yep.
Justin Cook: It could be a hold back right, based on a certain amount of training, or certain things, certain goal post being matched or it could even be seller retained equity, which we see less often but happens as well, what are your thoughts man?
Ace Chapman: So the reason that this is so important to me, as you know Justin, it’s part of it obviously it’s [inaudible 00:16:02] it allows the deal to be more affordable and all of the financial reasons. But the other thing that’s important is that do diligence check. So, you go through do diligence, everything looks good, but if a seller isn’t willing to kind of take some payments, it tells me one or two things. Either they don’t have a lot of faith in their business, and they’re concerned that you’re going to be able to make the payments. Or it tells me that they don’t have faith that you’re gonna be able to run the business. And honestly, as a buyer I wanna to listen to both of those. Because if the seller who knows his business, who’s built it from scratch, knows it inside out, they talk to me and they feel like either because of your background, or because they don’t have everything in place that allows a new buyer to come in take over that business, they don’t feel like you’re gonna be able to run it. That’s just as good of reason for me not to do the deal, as them feeling like the business itself is doomed.
Justin Cook: Yeah it’s interesting with seller financing, like it’s an easy way to sneak in additional benefits, right on the buyers side. You could make sure they require certain amounts of training, or that they’re processes are included, or that certain other things are met or matched and so I think that’s pretty interesting. One of the things I think is important from the sellers perspective, is that if you’re going to do an earn out, that earn out should be based on revenue and not profit. Profit can be, you know I had to put money back into the business man, I had a business expense right? I had to go to Vegas-
Ace Chapman: Absolutely.
Justin Cook: And blow it on black or whatever. You could throw in whatever, so that’s not ideal.
Ace Chapman: Yeah.
Justin Cook: Retained equity is a weird one, so you don’t see it all that often, but you’ll get it when buyers feel like they want to keep their [inaudible 00:17:45] around because they had some kind of specialize knowledge, they want to still involved in the deal, more than a month or two down the road. We’ve got a deal right now where the buyer is asking for the seller retained 10 to 20% equity, and obviously they get a discount too as well. But I think it’s interesting from the sellers perspective ’cause they’re sitting on something that could really blow and do really well. But you have this sometimes where sellers are like, “I’d like to hang on to this, but I got other things I’m working on, but I just know there’s real potential there”. Well that’s a way for them to put their money where their mouth is, and keep a little bit of equity and still try to guide the new buyer in the business along.
Ace Chapman: Yeah, I’m a big fan of tying the buyer in, obviously allowing them to have, tying the seller in. Obviously them having something like an earn out, gets them out at some point, and equity is a little more permanent, so as a buyer you want to take that into consideration, but in order to do any of these things, that point we mentioned earlier is crucial, and having that likability factor. If you’re planning on trying to get this seller to do something like hold back some equity, or do some financing, it’s gonna be pretty tough to get them to do that if they don’t like you.
Justin Cook: Yeah. Yeah that’s a pretty good point. The other problem with retained equity I think from the sellers perspective is like, when’s the next exit opportunity. How is that gonna be liquid for them, at any point in the future, and so that could be kind of a difficult thing. They just have to work together to do that and-
Ace Chapman: Yeah.
Justin Cook: I think you said, they’re gonna have to like each other. Let’s talk about the third point man, what do you think about a non-compete, how can that be negotiated or leveraged on one side or the other.
Ace Chapman: Before you can even negotiate that, one of the things you have to do the research on is to be sure they don’t own competitors already. We’ve been in deals where, they’ve been, we get in, or we get kinda late stage, and then we figure out, oh okay there’s this other site that you own, that you didn’t disclose, that is a direct competitor to this one, that’s kinda sketchy. So as a seller first of all, the more open you can be, and there’ve been situations where, it’s like okay here’s why you didn’t, maybe think that it was important to disclose that. But no matter what, a buyer is gonna get a little sketched out, if they feel like you’ve held anything back purposefully, or not on purpose, and so.
It’s really crucial for you to try to figure out, okay what’s anything, is there any level of competition, did I create a social media site that I wasn’t planning on really making a part of this deal, but I still need to disclose that I own that because it’s kind of connected to this, and so. All of those things are kinda the first step, then the step after that is coming up with a reasonable non-compete.
Now a lot of buyers will come in and immediately say, “okay you can never ever do another business like this for the rest of your life”. That can be a tough thing for a seller, and so what I like to try to focus on, especially if there’s financing and that kinda thing, I like to have few years where I’m gonna make all of my money back from the deal, and also obviously have time to build the business, create a lot further distance between me and somebody else. But if somebody does come back to this space, it’s not a direct competitor and it’s something that just happens to be in that industry, that’s not as crucial to me then just obviously doing something like copying the exact idea and restarting it. So you gotta be specific and have some clarity about how you negotiate the non-compete.
Justin Cook: Yeah and what that non-compete means. I think non-competes are kind of interesting, and this is kind of one of those, it could be a hotspot for you as a seller or buyer or completely not be. We’ve had situations where sellers they have three or four sites in the same niche, because they created them all when they were just starting out, and then one of them really popped. One of them popped up and did really well, and they kind of just left the other ones sitting there. So, when the buyer comes in and says look, I wanna make sure that I get these other sites you’ve created and I wanna make sure that you have a non-compete in this niche or whatever. Like that’s not even an issue for the seller, they honestly had no intention in doing it, they’re like yeah whatever I’ll throw that in. But that’s a hotspot for the buyer so you can use that as leverage right? That’s important-
Ace Chapman: Yeah.
Justin Cook: How can you make sure that you get closer to list or better than list to throw those in and throw in the non-compete. I think there’s an opportunity there.
Ace Chapman: Yeah, absolutely.
Justin Cook: Another thing with the non-compete is that it is contract based, right so. Unless you’re actually willing to, go after that contract or enforce that contract … I don’t know so if you’re dealing with a seller, that let’s say a Canadian national in Hong Kong, and you’re in Americans, like how are you gonna go after that non-compete, that might be difficult, especially on a smaller deal so just keep that in mind.
Ace Chapman: Yeah.
Justin Cook: That even if they’re willing to sign it like, do you believe them, right, does it make sense that they’re not doing that? Did they lie and have a site in space they didn’t tell you about, why would they do that, right? So these are, I think important things to keep in mind. Let’s get to the fourth point man stock versus asset sale. Have you ever done a stock deal?
Ace Chapman: Yeah, we actually did one about a month ago. It is a lot more complicated, probably 10% of the deals that are done, are done that way. Most of the time they’re larger deals, but it can be something that’s just necessary. I mean, if somebody has a corporation and just has things set up, originally as a company that is doing business with stock and is maybe taking an investor and all of these things, it just an asset sale just isn’t possible, or wise from a tax perspective. So I mean, if at all possible you always want to stick to a asset sale, ’cause it’s a pain. It’s a pain to do the stock sale, a lot more painful work. And then you get into everything is legal, even me as a consultant has to be extra, extra careful about any advice that I’m giving, I can’t talk as freely as I can, if it’s an asset sale. So it does, it gets a little more complicated with the stock sales.
Justin Cook: That’s interesting so we’ve done all asset deals. In fact attorneys and CPA’s I’ve spoken to say that 99% of the time an asset sale is always better for the buyer. So it’s always better on the buy side, and mostly on the sell side too. I guess like where a stock sale would make sense, is if it’s a very large deal and you’ve got a done of contracts that are tied up in that corporation. And the buyer needs those contracts to remain in place with that corporation, and maybe that makes sense.
Ace Chapman: Mm-hmm (affirmative), mm-hmm (affirmative)
Justin Cook: So yeah, I mean I think in general as a buyer you want to argue for an asset sale. And in most cases the seller wants that too. So if one is really pushing for one or the other, and that’s not a sticking point for you or not a hotspot then let that go and use that as leverage in the deal. What about training buddy, what do you think about training in terms of a leverage point or negotiation point.
Ace Chapman: When it comes to training, you don’t know how much you’re gonna need. And that’s the downside. A lot of times, until you get into deal, you just have no idea how much you’re gonna need, and so the more that you can prepare the seller to just expect to have to do a ton of training, and then possibly, pleasantly surprise them when you don’t really need that much training, the better.
The biggest mistake you can make here though is not kinda preparing for that possibility. Sometimes people can overestimate the ease of running a business, but the thing to keep in mind is you just don’t know what you don’t know. When it comes to these deals it’s an absolute nightmare when you get the buyer that is trying to get completely trained on everything before they close the deal, because the way that it really is suppose to work, is that you do diligence, everything makes sense, you go ahead and close the business once you’ve agreed on terms, and then you get trained on how to run the business. And so because of that, it’s tough to know exactly what you’re gonna need until you get in there and start to do things.
And then the other aspect of that is, you wanna make sure you’ve got loan term access and prepare them for that. So you don’t know what kind of problem may arise a year down the line, or two years down the line, where something pops up, an issue, or you’re trying to figure out something that’s not working correctly on the site, and the only person that really knows the answer is the previous owner, and so you want to be able to go back to them without them feeling annoyed or that that was absolutely outrageous for you to come back and still be bugging them about issues with a deal that done two years prior.
Justin Cook: I think as the buyer, if you know the site, you’re like look I understand this is a drop-shipping site, so it sounds very similar to parallel products, so what I’m used to selling anyway, and I know I can step in, I feel pretty comfortable with it. You could use that to kind of like ingratiate yourself to sellers, say look I don’t need a whole lot of training, I know what you’re doing here, I’m pretty up on it, and that will make it easier for the seller.
Especially, if there’s a hot point for them, like if they have already kind of moved on, maybe the site is declining, they haven’t really worked on it for a couple of months, like it’s a hot point for them to be able to move on quickly, and they know they’d rather work with you, then someone they have to spend the next two months kind of getting up to speed, so it’s a way for you to kind of like, I think help yourself out in negotiation. I think if you’re a seller, making the buyer feel comfortable that you’re gonna provide the training, that you’re gonna take care of them in the transfer process is helpful for getting them to close the deal and to get you paid.
Ace Chapman: Yeah, it does make it a lot easier, if you’ve got a seller that’s up front and say, “hey I’m willing to be there and do that”, but yeah I love that, I love that perspective. We actually are working on right now where the previous buyer has previously owned pretty much the exact business that he’s buying again. And so, that is a huge relief to seller that hey I’m gonna, ’cause it is a fairly complicated deal, and he’s gonna be able to come in, and that gives him a huge leg up over the other buyers that are gonna have to come in and figure it out.
Justin Cook: Sixth point man, staff and or contractors. So I think this is an interesting one, we get buyers sometimes are like hey did the, the employees come with the business? I was like man they’re not proper … first I joke and like, it’s not property. We can’t sell you the employees, and they’re like yeah okay well let’s talk about it and see where we’re at. But sometimes you’ll have sellers that say no. These writers are with me.
Ace Chapman: Yep.
Justin Cook: You can find your own writers, you can find your own employees but they’re coming with me right, and so that can be a negotiation point from buyers and sellers. How do you deal with the staff and contractor issue?
Ace Chapman: It’s a really tough thing, we we’re doing a deal that was in the subscription box face and the tough things they were gonna give employees but they had several employees and they had several businesses. They were gonna us, or my buyer wanted the employees or a couple of the employees. But the truth is all of the employees, worked on all the projects, they had specific things that they did on all the projects.
Justin Cook: Yeah.
Ace Chapman: So we really weren’t getting the actual team that ran this business. We were just getting kind of this little aspect of the team. And so we ended up not being able to get that deal done because of that. So one of the things you wanna think about from the sellers perspective is, let me build an asset that I can sell. Because at the end of the day, yeah you can say oh well I’m keeping these writers they’re with me, that kind of thing. But you’re gonna maximize your value when you can give somebody a well oiled machine. Every aspect that you take out of that machine, makes the machine less valuable because then this person has to go out and buy those parts to put it back together. So if you can, in that case, take a couple of those employees start to train them and say, “hey yeah we built the business, everybody who’s working on it, is kind of, that kind of thing”, but for the last six months this two man team has been running this business.
Justin Cook: Yeah.
Ace Chapman: Based on the revenues, it’s continued to grow so we’re gonna give those folks with you, and that becomes a more valuable business.
Justin Cook: Yeah, I just sorta, was looking to sell, they’re wanna gonna start to separate that out. Just like they’re separating out their finances or separating out their expenses, you’re gonna want to separate out your team, so that they’re all trained up and they’ve got everything. It’s so common though, if you’re running multiple businesses, you have a team of people that are, have their hands in multiple businesses and if that’s the way you run it that’s fine but as you’re coming up on a sale you may want to separate that out.
So Ace, let me ask you this. So you’re working with a buyer and the sellers like look I’m not letting this staff go with this deal, what’s a counter point to that, like would you do some kind of hold back, would you do a earn out or something. How can you kind of like, balance that out?
Ace Chapman: Yeah, I think when we look at both of those, but I do like to communicate the fact that this makes this business less valuable.
Justin Cook: Yeah.
Ace Chapman: So that’s where we would prefer to do just a discount of the price and maybe do some of those other things in addition, but that would be a really reasonable thing to come back and say, “because of that we really need a discount on this”.
Justin Cook: It’s a risk, right? I mean, it’s a risk-
Ace Chapman: Yeah.
Justin Cook: that you’re taking on, it’s like a gamble.
Ace Chapman: Exactly.
Justin Cook: Like you don’t know how this business is going to operate with the team, right? It could completely fall apart. And I think, mentioning this Ace, it’s kind of a side topic, but that’s one of I think the really valuable parts of bringing a team to deals. So as a buyer, if you have a team that you can kind of step in and they’ve worked with you on a couple of other deals, like that’s fantastic. So having that someone-
Ace Chapman: Yeah.
Justin Cook: that can step in and take over a business, if you do the deal. You both get the discount, ’cause they’re not willing to include their team and there’s risks, and it’s a bit of a gamble but you’ve got a track record of having them step in and run businesses is really helpful.
Ace Chapman: Yeah exactly, I love that.
Justin Cook: All right man, so let’s talk the seventh point, which is inventory. And this is an interesting one for the E-Commerce peeps right? This is an E-Commerce issue, there’s two thoughts right? On the one hand, the buy side, like would you buy the business with zero inventory. Like it’s not a sellable business right, without the inventory. It becomes a zero inventory, like you basically just have to buy more inventory to even keep the business running. So you have to keep it flowing. And on the other hand, for businesses that are way overstocked and they had stocked up because they were prepping for growth, they shouldn’t be penalized for that either, right?
Ace Chapman: Yeah, yeah. It’s funny, it really goes back to that buying the machine thing. It’s not a problem as far as paying for inventory. I think that it’s totally fair to say, “all right we want to be paid for our inventory and so this is the price of the business”, where it’s really just not as fair is to think that that’s some separate thing from the sales price. So,
Justin Cook: Yeah.
Ace Chapman: If I’m out and I’m buying businesses and I’m looking for a business that has a $100,000 cash flow. I want to buy that cash flow, I’m not in the business to buy inventory. I didn’t wake up and say, “you know what I really want, I want $30,000 worth of inventory”. So if I have one business that gives me that $100,000 of cash flow, and I can buy that $200,000 and it doesn’t … maybe it’s a SaaS business whatever it doesn’t have any inventory, then okay that becomes an option. If I also have this E-Commerce deal, that’s $200,000 but then they want me to pay another $50,000 for inventory.
Justin Cook: Yeah.
Ace Chapman: I’m still comparing it to that first deal.
Justin Cook: Of course you are.
Ace Chapman: So at the end of day it’s still has to be, okay this is the sales price of the business and so the seller of that business has to understand that, they’re still competing with the other businesses that are available on the market.
Justin Cook: Yeah one of the ways you can do this, I think it’s relatively fair, is to look at inventory levels, like throughout the year, and what they’ve kinda needed the last year, year and a half, two years. And then set a baseline, and say okay inventory needs to be at this level based on your growth rate, here’s where it is, and the plus or minus percentage that they’re above or beyond you can have them pay for that additional amount right? Or pay a discount because there’s not enough, that’s another issue too. Sometimes the sellers will kind of clean out their inventory, right,[crosstalk 00:33:53]
And saying, “oh I just, I don’t have any inventory”. And they hand it over and they’re like okay well now I gotta go buy inventory anyways, so you’re gonna wanna take a look at that, and then you could negotiate based on how far off the baseline, the inventory is either up or down.
Ace Chapman: Yeah, absolutely, that’s crucial.
Justin Cook: All right man, let’s do some negotiation tips. And you’ve got some good one’s here man. You’ve done some crazy negotiating deals. So what’s your first one?
Ace Chapman: Well one of things you gotta find out, is what does the buyer really want, or the seller really want that the buyer can provide. So we get involved in a lot of deals where the seller has something going on in their life, and they may be distracted because of this or whatever it may be, the time is really important. So like you’ve mentioned when you’ve got a person where time is really the most important factor, that’s the only reason they’re selling the business, a huge negotiation point for that seller, would be okay I’m gonna make sure that this doesn’t take up much of your time, when it comes to training, we’re gonna do, spend a day after closing, I’ll have everything I need and then you go your way, you can focus on what you’re doing. If that is something that really is motivating the seller of that business, that’s gonna be really valuable to that seller.
So just like we were mentioning with the other deal, finding out the why behind the sell of the business, and what they are looking for out of the deal can help you figure out how you need to structure the deal, or what points you need to put into the deal, and focus on when you’re communicating your offer in order to get the deal done.
The other thing that people don’t do as good a job of is that whole process of communicating your offer. One of the things that’s a neat process, is if you’re doing something like some seller financing, and you’ve got a note, and you’ve got maybe an interest attached to that note. Show that seller, “hey with my offer I’m giving you this amount of money, you’re gonna finance this over this period, I’m gonna hold back, you’re gonna hold back a little bit of equity on it, and in two years with interest and where I expect the equity to value, and what you’re getting up front, the real offer is this total amount”, which of course is gonna be a much bigger number then what they’re thinking. And so you wanna be clear, you wanna show all the benefits. That’s benefit that 99% of buyers never kind of show the seller so that they understand, “hey it’s beneficial for you to do this structure and allow me these terms”.
Justin Cook: That’s funny man, that’s a little role reversal there. A lot of times you have like sellers trying to sell a potential, right they’re like, “oh I can do this this and this,” but this is actually a deal where the buyer is like “oh I’m gonna do this this and this with it,” and you’re gonna make this much more money on the deal ’cause I’m gonna be successful building it out. I see how that works man, I’m on to your tricks Ace. I’m on to your tricks.
Ace Chapman: I know, I know man. I’m releasing the tricks.
Justin Cook: I like the idea, and this is an old school sales tactic, but just peeling back the onion until you find out what really motivates them, right? So, the idea that, let’s just say for example there’s a deal, it’s a $100,000 deal, and the buyer’s trying to figure out the seller, why what’s kind of your reasoning, and I was like, “all right I just, I want the money.” “Okay you want the money, for what?”, “well you know”. You have to dig a little bit, you have to kinda dig [inaudible 00:37:00]. But like so you find that the reason the seller wants it is, well they want to buy a house.
Ace Chapman: Yeah.
Justin Cook: And so come to find out, they don’t need the full $100,000, but they $50,000 in two weeks for the deposit on the house. Okay now you know kind of what you need to get them in cash to get that deal done. So you’re gonna need to get that 50,000 really quickly, right? Maybe the rest can spent over 30 days or over the next 12 months or whatever. But you know what they need, you know that you need to [inaudible 00:37:25] them quickly ’cause that’s the real heart of the issue, is they need 50,000 for the deposit within the next two weeks. Now you know what you’re working with and, I don’t know there’s this whole train of thoughts, like look, don’t show your cards and try and not tell them kind of, where you’re coming from or what you really want, stonewall them or whatever. I don’t know I don’t by that man, I mean ’cause ultimately … you both have stepped up, you’ve raised your hand, said look I want to do a deal, being honest with each other in laying out why you wanna to do that. And wide eyed and like not, some being naïve about it, but laying out what your motivations are, helps you find that common ground I think.
Ace Chapman: Yeah, it does. I call it kinda the combative negotiation versus collaborative negotiation. And the more you can focus on, hey let’s sit on the same side of the table together, and tell me what you need, I’m gonna tell you what I need, and where I’m coming from and let’s work together to see, if we can create, like you mentioned that win-win, where both of our needs perfectly meet. It’s almost like a axis, like I’ve got everything that I think would be amazing to have and to have all the things that I would never deal with, you have the same. But as you kinda cross those two lines, there’s a point where both of your needs kinda meet in the middle. And that’s where you wanna try to end up. And the easiest way to do that is certainly, not coming in and being combative and trying to beat the other person down in negotiation. It’s easiest to get to that when you’re basically sitting on the same side of the table and negotiating together with the attitude of trying to meet each others needs.
Justin Cook: Yeah, there’s just gotta be some trust there, and when you have more trust, you are more collaborative like that’s just the way it works. And you can go down the list and say, “okay that’s not important to me,” and they go “yeah no me either,” “okay, let’s do this,” “let’s just do this on normal terms,” “yep normal terms I’m good,” and then we’re like “hey let’s just do it this way,” and they’re like “no no no I wanna do it this way,” “okay now we’ve found a hotspot for both of us, let’s see how we can work this out,” or we give somewhere else.
So yeah I think that’s important and it is cool to stay cool right? Like you don’t know where that deal’s gonna go. You were telling me I think, I can’t remember if it was on the show or off the show about some crazy deal you had where some guy jumped all over you, like you were trying to be cool about the deal, you were trying to make the offer, and the guy was yelling and screaming and hustling and bustling, just getting all crazy and, if you’d kinda lost your cool, that deal could’ve been done. Like it wouldn’t have happened, but because you were professional about it, walked away and said look let’s just think about it, take a little bit of time cool off, and you ended up doing the deal. So even when you think a deal is done, it may not be. It may bounce back and still be alive.
Ace Chapman: Yeah, I mean it’s amazing. Even I had my doubts on that one that you’re talking about. I mean you could be completely cursed out and kicked out of somebody’s house and all these kind of things that are just pretty outrageous, but at the end of the day, the more you can have that attitude of staying cool, being calm, and saying “hey we can still start back the conversation when you’re ready, or if you’re ever interested,” that at least leaves the door open and I’ve had plenty of clients, where we go through our deal flow process, I’ve got a guy up in Toronto, that we’re gonna be doing a video with, who two years ago made an offer on a golf internet business. And they scoffed at it, “oh this is outrageous”. They actually sold to another person, that person ended up getting sick, couldn’t make the payments to them anymore, and they came back to him, because they were so impressed with him, like hey we don’t want to put this thing on the market again. We’ve already gotten all this money, If you will pay the price that you were originally gonna pay, we’ll give you this deal for no money down.
And that becomes, just, we’ve got case after case of things like that. When you kinda go through this process and you’re doing those extra things and you’re communicating what you’re trying to do with the seller. That can have an impression that maybe you don’t even get the deal today, maybe you don’t get it for six months, maybe you don’t get it for a year, but if you have people that start to come back to you and I’ve been doing this stuff for 16 years, so I’ve got people that come from 10 years ago, like, “oh I remember you”, and we’re ready to do a deal.
Justin Cook: I like that, It’s interesting to you like, there’s something with entrepreneurship and running your own business where, just the time of being in business, for 16 years. Just being in business that long, gets people like, you do better right? You’re gonna grow, like without anything, everything else being equal, just the time factor,
Ace Chapman: Yeah.
Justin Cook: Is gonna cause you to do more business and make more connections and do more. And man we’re talking about this today and it’s just no way around it, like negotiating a deal, whether you’re on the buyer or the sell side could be really confusing, stressful, and [inaudible 00:42:13] but I think, as you said if you can keep your cool, look for the hotspots, can see the other points, and then try to negotiate in a collaborative effort, that’s gonna ultimately give you the most amount of deals. And if it doesn’t work out being cool, not burning the bridges, it may leave room for opportunity in the future.
Ace Chapman: Yeah, I think the thing to remember is just keep calm, keep your wits about you, deals have been proven that they could stay alive a lot longer than the average person thinks.
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