In 2017, just prior to the sale of my business, I recognized my business’s valuation would be dependent on multiple factors, most of which were the current and prior year’s EBITDA numbers.

I also realized every $1 I was able to save in expenses would go directly towards the bottom line and, in turn, would improve the business’s valuation by $5 or greater. So if I were able to save $100,000, as an example, that would lead to an additional increase in valuation of $500,000.

There was a high incentive to maximize profits and reduce expenses where possible. 

Beginning in 2017, I began the process of evaluating many of our supplier agreements, purchase prices, and terms. As we drew closer to the close of transactions, I was able to demonstrate enough savings to make a very material difference to the profitability and, in turn, business valuation. 

Unfortunately, I neglected these supplier terms for so many years, I didn’t have enough time to capture most of the savings. I should have started negotiating new terms much sooner.

Before we move on, you might enjoy this short video from Anthony on mastering negotiations. It’s only 2 minutes long and worth watching:

Negotiation Strategies and the Importance of Negotiations for the Business 

What is the importance of negotiation in a business environment?

As a small business owner, you’re at the negotiating table all the time. Listed below are some sample areas that can have a large impact on the business’s bottom line.

4 Areas Where the Business Owner Can Negotiate to Maximize Profits and Business Value

1. There are some clear advantages of negotiations in purchasing. You need to negotiate supplier agreements and terms. You’re always looking for a better price. At the same time, you want to leave your supplier wanting more of your business.
2. As your business grows, you need to hire staff, both employees and contractors. The negotiations are always ongoing and start from the moment you say, “Hello, great to meet you,” for the first time. You negotiate the starting contract and salary, and then you negotiate your staff’s raises, bonuses, promotions, and benefits. 
3. You’re always negotiating with your clients, whether that’s for payment terms, price, or deliverable dates, and then you want to make sure you—and your client—are pleased with the outcome. At the end of the negotiations, if you “win” and leave your client feeling like they “lost,” then you win the battle but, in the end, might lose the war by losing the client.
4. The biggest prize of all, as I mentioned, is when you sell your business and you’re dealing with potentially thousands or millions of dollars. In those cases, small tweaks to your negotiating can leave you with better terms and more dollars in your pocket. 

Understanding negotiations—in fact, mastering negotiations—is probably one of the most important skills you can acquire as an entrepreneur.

Small Differences in Negotiations Can Make a Big Difference. 

How a Successful Negotiation Can Make you Millions

Running and growing a business is challenging. What I find surprising is the number of small business owners who seem to have a thriving business with increasing year-over-year revenues but, when you dig a bit deeper, aren’t making much profit, if any at all. 

And that’s where small differences can make a big difference.

Let me illustrate.

How Can a 5% Savings Make You an Additional $250,000? 

Let’s imagine your business has revenues of $2 million per year. You’re negotiating with one of your largest suppliers, who provides you with the bulk of your product. This supplier makes up about 40% of your business’s overall purchases. 

If you spend $400,000 with this supplier, small changes or improvements to the contract can make a big difference to your profits.

For example, you could:

• Negotiate better payment terms, perhaps a discount of 2% net 10, where if you pay your invoices within 10 days, you get a 2% discount
• Negotiate better purchase prices by, let’s say, capturing an additional 3% off the purchase price

Combine the above two discount savings, and you could be looking at a 5% savings, or the equivalent of $20,000 per year, just from that one supplier alone. Those savings go straight to your bottom line.

If you spend $1 million with your various suppliers per year, a 3 to 5% savings could amount to $30,000 to $50,000 in additional profits, and if your business is making a 10% EBITDA profit margin or $200,000 per year in profits, that amount is now $230,000 to $250,000 in profit for an 11.5% to 12.5% EBITDA profit margin.

Keep in mind, your business’s valuation is based on many factors, the largest of which is your EBITDA. At a 5 times EBITDA multiple, that $50,000 in savings per year could amount to an additional value of $250,000 for your business.

One other important point you need to consider is what your business is returning in terms of return on equity. So for every additional dollar, you invest in your business, what can you expect as a return on that invested dollar? 

You have a choice, of course. If your business can produce an additional 3% in EBITDA profit margin, where will you spend those additional profits? You can:

• Spend the profits on a beautiful vacation for you and your family
• Invest in new machinery for the plant
• Start a new marketing campaign
• Hire a new salesperson

The possibilities are endless. The point of the above exercise isn’t to provide you with a list of options but, rather, demonstrate that the additional $50,000 in profits could be spent on a new marketing campaign, which could result in an additional $500,000 in revenue.

Negotiating needs to be something you do proactively on a daily and weekly basis. It is always happening, overtly when you call a supplier and subtly when you go for lunch with an employee or client.

In consideration of the above, let’s review some of the things you need to do in order to prepare for, and do better at, and to achieve a successful negotiation.

6 Things to Know on How to Win at Negotiations in Your Small Business 

1. Be Prepared 

There’s a Thomas Edison expression that comes to mind: “We should remember that good fortune often happens when opportunity meets with preparation.”

Some questions you should prepare in advance of your meeting: 

• Who are you meeting with?
• What are you looking for from the discussion/negotiation?
• What might the other party be looking for from the negotiation? What is their best, and worst, outcome?
• What is your best possible outcome?
• What is the worst possible outcome?
• What is your BATNA? (Best alternative to a negotiated agreement) In other words, if you are unable to negotiate successfully, what is the next best alternative?

Take time before your meeting to prepare yourself for the ask and possible objections.

Structure your objectives so you have thought through every possible negative outcome. You need to understand the needs of the other party just as much as you need to understand your own needs. 

Knowing their needs requires listening, investigation, and intuition on your part. Do this homework before you sit down, not after.

2. Be Likeable and Open 

This sounds like a no-brainer, but it is worth reminding you of the importance of approaching the discussion with an open mind, and yes, that is a negotiation tactic.

Sometimes when we believe we are “going into battle,” we prepare accordingly, armor on and backup ready for objections. This seeps out in our posture, information, and other body languages. Shift your mindset, right at the beginning. What you are looking for is a friendly solution to the problem at hand, and what you need is a collaborator.

Negotiations should where possible, be win-win. Otherwise, you risk alienating the other party and driving them from even wanting to make a deal with you. 

3. Look for Commonalities

Remind the other party of ways in which you are both similar, as familiarity breeds trust and openness. Find a common ground, whether deal-oriented or from life in general, and start your conversation there. 

Studies show it is also advantageous to copy the vocal patterns, emotional state, and body language of the other person. 

4. Try to Go First? Maybe 

I have two thoughts on the negotiation tactic of trying to go first:

1. A study published by Harvard Business School suggests you should try to go first in a negotiation (to bring the side to your favor). The first offer sets the anchor, around which future offers will circulate. If you want this to circulate in the same ballpark as where you are hoping to land, going first and setting that point down will help you. Negotiation experts also suggest you aim high in your offer so that negotiations can bring you down to a place you are actually happy with.
2. The other school of thought is that you let the other side present their starting position first. It’s quite possible their starting position is better than the best possible outcome you could have imagined, in which case, it will make for a potentially very quick negotiation. On more than one occasion,I was pleasantly surprised at what the other side’s opening position was. 

The point of the above isn’t to contradict myself but, rather, to make you aware that all negotiations are fluid. You need to assess each situation uniquely and on its own. 

5. Think Outside the Box 

Again, be open. Sometimes there is a winning situation that isn’t exactly what you proposed.

Maybe there are different ways to be compensated but still come away from the deal with everything you need. Ask yourself,“How can I improve this deal even if I don’t get everything that I want?” Present alternatives if the conversation needs it.

6. Provide Detail, Solutions 

When you are asking for a situation or improvement that clearly benefits you, be sure to focus on how it benefits the other side. You need a win-win outcome in order to satisfy all parties. 

One researcher suggests explaining your demands in terms of the good for the overall organization or parties involved. Think about the benefits of your proposed offer for the other party. Position these benefits as a solution to problems they have so you come across as giving (for their good) rather than simply taking (for your own good). Provide as much detail as possible about how your proposed plan will roll out and how it will impact the other side. 

Negotiation is not an easy art to master. Overall, you should show concern for everyone and position your proposition as not just good for you but good for all.

Good luck with your wealth-creating journey.

If you liked this post, you might also like this one: How Do You Know When It’s Time to Sell Your Business? It’s Not All About the Money.

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Also, I published a book during the summer of 2018, “The Kickass Entrepreneur’s Guide to Investing, Three Simple Steps to Create Massive Wealth with Your Business’s Profits.” It was number 1 on Amazon in both the business and non-fiction sections. You can get a free copy here.