Negotiating the Final Terms of Your Business Sale
Business sale negotiations can be a scary process for both the buyers and sellers of small businesses. Each hopes to close the deal while making the fewest number of concessions. Owners who have prepared for the negotiation stage will be much more likely to get the purchase terms they desire.
As you enter the final negotiations of a business sale, here’s what you should assume the buyer either knows or at least thinks:
- You’ve priced your business on your own based upon emotional attachments.
- The down payment or amount of cash you receive on closing day is almost as important as the overall purchase price.
- In the end, the price will be determined by what the buyer is willing to pay and what the seller is willing to accept.
- Everything is negotiable.
With those thoughts in mind, realize that the buyer most likely approaches closing day with an intention to arrive at the best possible deal before signing the final purchase and sale agreement. And, likely, you intend to do the same. A few simple steps will help you through the back-and-forth, give-and-take that leads to the buyer’s final offer and your final acceptance.
Step 1. Be ready for the negotiations in front of you.
Don’t begin negotiations until:
- You have a signed letter of intent outlining the buyer’s proposal and, if necessary, your counter-proposal.
- Your sale advisors have provided you with legal and accounting advice regarding the sale structure, price structure and price allocation that offers you the greatest financial benefit at the lowest tax liability.
- You are clear about your own financial objectives including the amount of money you want to receive at closing and whether or not you’re willing to accept deferred payments by offering a seller-financed loan.
- You know the issues that absolutely must be addressed for the deal to go through. Some call these your deal-breakers. Others call them your knock-out factors, or your walk-away points. Perhaps you have a price figure you’re not willing to go below. Or an amount you absolutely must receive at closing. You don’t want to be unreasonable, but if you clarify limits before entering negotiations you’ll know when to say yes and when to say no.
Step 2. Be clear about what your negotiation needs to achieve.
Between now and closing day you and the buyer need to agree upon the issues in this chart, which you can refer to as a checklist:
PRE-CLOSING NEGOTIATION CHECKLIST
What’s being purchased: The assets of your business, which will be transferred into a new business entity formed by the buyer (called an asset sale); or your business entity and all its assets and liabilities (called an entity sale).
The purchase price, which will likely be 70-90% of the asking price. Closed deals reported to BizBuySell.com have average sale-to-asking price ratios of 87-88% over the last few years (2009-2011).
How the price will be paid, including how much will be paid at closing and how much, if any, will be paid through a seller-financed loan or deferred payments including earnout payments.
How the price will be allocated among the IRS-defined asset classes.
How to address issues discovered during due diligence, whether through price concessions or actions that rectify conditions of concern.
How to handle the transition period, including how and when to contact customers and clients, whether employees will be rehired and how and when the sale announcement will be made, how suppliers, vendors and distributors will be notified, how work in progress will be completed, and how unknown liabilities that become apparent after the sale will be addressed.
Your post-sale involvement with the business, covering such details as transition period involvement, timeframe and compensation, if any; post-sale involvement through a personal services contract; and your willingness to sign an agreement or covenant not-to-compete.
How contingencies will be addressed/removed. These include such conditions as issues that arose during the due diligence investigation, acceptable transfer of leases and contracts, acceptable bank financing and other contingencies detailed in the letter of agreement to purchase.
Step 3. Be ready to start and keep negotiations moving.
Delays kill small business sales – especially during the negotiation process.
To keep negotiations moving, start by having all the information you need, including:
- The buyer’s purchase proposal in the form of a signed letter of intent.
- Advice from your broker, if you’re using one, and your attorney and accountant on each of the points in the preceding chart.
- Clarity about your personal objectives and limits.
Once you begin negotiating details, consider this advice:
- Use your objectives as a steering device. If you need to concede on one point, negotiate an offsetting advantage on another point. This advice applies particularly to price negotiations. If you need to settle for a lower price, your sale advisors can help you balance the concession by structuring the price for greater tax advantage or by altering the payment terms to reduce collection risk.
- This isn’t the time to increase your asking price. You may begin to think your business is worth more than you asked, but don’t try to increase the price during negotiations.
- This isn’t the time to get complacent about protecting your interests. By this stage in the game you may almost feel in partnership with your buyer. Still, don’t let your guard down when it comes to requesting personal guarantees and collateral agreements to back a seller-financed loan; or to request ongoing access to business financial records until the loan is repaid.
- This definitely isn’t the time for ultimatums or one-sided victories. It’s safe to assume that if you’ve gotten this far, you both want the deal to close. So aim for a win-win conclusion by offsetting each of your necessary demands with a compensating buyer advantage, and by working together to address the issues necessary to meet both your objectives.
- Keep things moving quickly. During negotiations you’ll need to call a few timeouts in order to obtain input from your sale advisors regarding legalities and tax implications. When doing so, obtain the necessary information in the same day if possible. Delays either dampen interest or heighten concern – neither of which supports the kind of healthy negotiations that lead to a victorious closing day.
In next week’s installment of “Selling Your Small Business” we’ll discuss the best ways to ensure a smooth closing.
Editor’s Note: This article is the 22nd piece in a series taken from BizBuySell.com’s Guide to Selling Your Small Business. The guide is a comprehensive manual to help small business owners maximize their success when the day to sell arrives. Each Wednesday, Inc.com will publish a new section of the guide outlining BizBuySell.com’s best practices, from the initial planning stages of a sale all the way through negotiations and post-sale transition.