The advisor's role in negotiating the sale price of small and medium-sized enterprises (SMEs) is key to ensuring the company gets a fair and competitive price for its tangible and intangible assets. The advisor acts as a strategist, facilitator, and negotiator, providing the information and tools the company needs to reach pricing agreements that benefit both the company and its clients.
5 roles the advisor plays when negotiating the sale of an SME
Their main roles and responsibilities include:
1. Market and competitor analysis
The advisor must carry out a thorough analysis of the market and the competition to understand current prices, market trends, and how the SME is positioned compared with its competitors. This includes studying the prices of similar products or services, rivals' pricing strategies, and consumer habits and/or market conditions (shifts in supply and demand) that could affect prices.
2. Assessing costs and margins
Before negotiations begin, the advisor should help the SME calculate all the costs involved in the production and distribution of its products or services. This includes fixed costs, variable costs, and any additional expenses. With this information, the advisor can determine the profit margin the company needs to be profitable.
3. Setting pricing strategies
Based on the first two points, the advisor helps the SME develop pricing strategies that are competitive and attractive to customers, but that also ensure the company's long-term profitability and are aligned with the SME's business strategy. These strategies can include value-based pricing, volume discounts, and dynamic pricing, among others.
4. Preparing for the negotiation
Here, the advisor's role involves educating and preparing the SME for the negotiation by setting clear objectives, price limits, and possible concessions. It's important to present solid arguments to justify a reasonable value — that is, one that isn't out of line with the market and is fair and objective. At the same time, throughout this process the advisor makes sure the SME's reputation is protected.
5. Direct involvement in the negotiation
In many cases, the advisor takes part directly in the price negotiation, acting as an intermediary or representative of the SME. Their role here is to use their experience and skills to negotiate favorable terms, handle price objections, and find solutions that satisfy both parties.
Factors for calculating the sale price of an SME
Beyond tangible assets (real estate, machinery and equipment, inventory, vehicles, office supplies), there are intangible assets that aren't always taken into account, as well as other elements that can go unnoticed:
Profitability and cash flows
The advisor analyzes the company's financial statements, especially the income statements and cash flow statements, to assess historical and projected profitability. Free cash flow — the money left over after covering all operating and capital expenses — is essential because it represents the funds available to shareholders.
Growth projections
Future growth opportunities are taken into account. These can include expanding into new markets, developing new products or services, or optimizing operations to improve efficiency. An advisor will assess both internal prospects (the SME's strengths and weaknesses) and external ones (opportunities and threats in the market) to project growth.
Market position and customer base
The SME's market share and customer loyalty are decisive factors. A company with a strong market position or a loyal, recurring customer base can be worth more, since these elements provide stability and opportunities for future revenue.
Management team capabilities
The experience and expertise of the management team are important intangible assets. A strong team with a proven track record can run the company effectively, tackle challenges, and seize opportunities, which increases the company's value.
Intellectual property and technology
The patents, trademarks, copyrights, trade secrets, and technologies the SME offers can be crucial to its valuation, especially if they represent a competitive advantage in the market.
Special licenses and permits
In some sectors, holding certain licenses, permits, or certifications can be crucial to operating or to having a competitive advantage.
Reputation and brand
The company's reputation and the strength of its brand in the market can significantly influence its value. A recognized and respected brand can attract more customers and support higher price margins.
Revenue diversification
Companies with diversified revenue streams tend to have a higher valuation because of the lower risk associated with losing any one specific revenue stream.
Relationships with suppliers and partners
Strong relationships with suppliers and business partners also add value to the SME. These relationships can provide supply chain stability, better credit terms, or access to new markets and technologies.
Macro and micro conditions
The economic context and the situation of the specific sector in which the SME operates influence its valuation. A company in a growing, countercyclical sector — that is, one less susceptible to economic fluctuations — can command a higher valuation.
Network of contacts and business relationships
A standard valuation often doesn't reflect the personal and professional connections of the management or sales team, which can be a valuable asset. These relationships can open the door to new business, strategic alliances, or more favorable negotiations.
Organizational culture
A company's culture can be an important asset, especially in sectors where innovation and creativity are essential. A strong, positive culture can improve employee retention, increase productivity, and attract top talent.
Proprietary databases
The customer, supplier, and market databases the company has built are extremely valuable. This information can be used to personalize offers, improve products and services, or run more effective marketing.
Valuation methods
Once the assets to be valued have been identified, the estimated sale price of an SME depends on the type of valuation the advisor carries out. The two methods most widely used in business sales are the EBITDA multiple and discounted cash flow.
Without going into the details of each methodology, the main difference between them is that the first values the company according to the multiples being paid in its sector and in the country where it's located, while the second involves a more thorough and precise valuation, discounting what the SME generates over two years and extending it over as many years as the advisor sees fit. A realistic approach would be a five-year discounted cash flow, projecting growth rates based on the company's performance over the last five or ten years.
What if there are valuation discrepancies?
To hedge against possible valuation discrepancies, the advisor puts forward a clause known as an earn-out, which ties part of the purchase price to achieving a series of milestones.
Assuming the valuation is reasonable and at market price, if the two parties still disagree, the advisor tries to negotiate with the buyer and explain that there are several ways to reach that value. For example, there can be an upfront payment, which is the first payment made when the deal is signed before a notary, and a deferred earn-out payment over a period of time that is tied to targets and released gradually.
In short, there are three keys to successful negotiations: the business owner's price expectations must be in line with the market, the advisor's valuation must be done properly — without cash flows prorated over twenty years or unadjusted growth rates — and the target buyer or investor must be the right one.
