When to Get a Valuation in Negotiations
We do a significant number of business valuations for negotiations- situations ranging from shareholder disputes, divorces, lost profit claims – you name it. And one question that we constantly see clients struggle with is when (or if) to get a valuation completed. We constantly hear something along the lines of “we are in negotiations, but I’ll let you know if I need it.”
Our thoughts: “what??” The sooner you understand value better the outcome for your negotiation. Here’s why.
Negotiate from a Position of Power
If you were buying a car, would you start negotiating with the dealership without doing a bit of internet research? Of course not – the first thing you do when you start that process is jump on Kelly Blue Book or something similar and find out how much the car’s “book value” is (as well as the likely value for your trade in). And there is a simple reason for that: how on earth can you effectively negotiate if you don’t have a clear understanding of the range of values involved?
Business valuations are similar – only typically with a significantly higher amount involved and much more opaque pricing. But still under that lens of the car transaction, why on earth would you engage in a negotiation withing knowing the baseline value? What exactly are you negotiating for? Negotiation experts often claim that it’s critical to understand your “BATNA” – or “Best Alternative to a Negotiated Agreement.” And to understand your BATNA? Get the valuation completed.
You Can’t Un-ring the Bell
Let’s go back to our car example above. Say you start you negotiation without your research, come to an initial agreement, and then pull out your smart phone and say “Oh My! I can’t pay that. The Blue Book Value is way less.” Fortunately (unless the car salesman has convinced you to sign on the dotted line) you have the alternative of renegotiating. Why? Because worst case scenario you go down the street and start over at another dealership. There are alternatives available that still give you some negotiating power.
How about when the subject of the negotiation is the business which you own? Well, you only own one of them. There is no particular alternative. Once you agree to a pricing structure it is extraordinary difficult to “re-price” as you have already established a position. The other side is surely going to have quite the mental hurdle to overcome to in altering their position.
The outcome? Expect a protracted situation that often comes to litigation and increased expense.
Remove the Emotional Aspect
Business owners love their businesses. They’ve put an incredible amount of effort into them to get the company to the point it stands at. Thus when it comes to issues such as valuation or the sale of an interest, it is often difficult to separate the emotional attachment from the business from what the market thinks of the business. This often distorts negotiations with shareholders and causes a great deal of angst.
One way to avoid some of that angst is to engage a “disinterested” third party. As a neutral player that is bound by professional ethics, a valuation firm attempts to speak for the market and can help remove some of the emotional baggage that is tied up in shareholder negotiations.
The bottom line in these types of negotiations is that you are trying to achieve the best value for your position while minimizing out of pocket costs. Engaging a valuation professional early can help mitigate your costs over the long run, as well as help you work from a position of knowledge and power during the negotiation.