Time your negotiations by understanding owner psychology.
Everyone wants to talk about price in mergers and acquisitions. It’s often the number one focus of buyers and sellers…but for opposite reasons. Both are likely to say they are looking for a “good deal,” but this can have a completely different meaning depending on the perspective.
Buyers often tell me they are considering an acquisition, and if a “good deal” appears, they will buy the company. And by “good deal” they mean a cheap deal. On the other hand, sellers are usually hoping to offer their business to the highest bidder. This disconnect between buyers’ and sellers’ expectations is further emphasized when they put price as their top priority and use it to qualify a deal as good or bad. The truth is there are many nonfinancial factors to consider when you’re contemplating a purchase. The key is to understand owner psychology and what a huge part this plays in the decision to sell.
Understanding Owner Psychology
Owners say “no” to selling their businesses for many reasons, especially in the case of not-for-sale, strategic acquisitions.
These factors can include:
- Age – The owner might be too young and not ready to sell
- Family – A spouse or heir may take over the business once the owner retires
- Community pride – The owner may employ many people locally, donate to area charities, or sponsor community after-school programs
- Insecurity and risk – The owner might be intimidated by a sophisticated buyer or afraid to sell the business, especially one they’ve built from the ground up, to a stranger
On the flip side, owners do sell their businesses for many reasons other than high price.
- Age – They may want to retire and are burned out
- Family – They may have no heir to take over the business or their spouse may be nagging them to retire
- Insecurity and risk – Selling now while the business is performing well may mitigate their risk
- Excitement – They simply are excited to be considered for acquisition, because of the prestige or a possible financial windfall
You’ll notice that many of the reasons why owners do or don’t sell are just two sides of the same coin. And the same reasons could push different owners in different directions. For example, one owner in their 60s might be interested in retirement, while a different owner at a similar age might still enjoy coming to work every day. It’s important to find out what factors really matter to the owner so that you can build the right “equation.”
Identifying the issues that matter to the owner can help you convince him or her to sell the business and work out a mutually beneficial deal. You might find that the owner really cares about the environment. As part of the deal, you might maintain or even improve upon environmentally friendly practices. This way, you show that you share the same values as the owner, and you might obtain the company for a lower price than a competing bidder who is indifferent to the environment.
When you approach owners with a complete understanding of all the different factors that are important to them – age, community, family, financial, and risk – you increase your chances that they will say ”yes” and sell their business to you.
This post was contributed by David Braun, CEO of Capstone Strategic, and author of Successful Acquisitions.
There are more factors than price in any purchasing decision. Make the best financial decisions for your company with these AMA resources and seminars.