Selling Your Business? How to Negotiate a Purchase Offer

The buyer's proposed price and payment structure

Likely the buyer will offer less than your asking price, which can become a point of later negotiation. The buyer also will describe how much will be paid in cash at closing and what kind of financing will be necessary, likely to include some percentage of the deal to be finance by you, the seller. Discuss the price and payment proposal with your accountant and attorney before discussing it with your buyer, because the payment structure will come with tax implications.

The buyer's proposed purchase structure

The vast majority of small business sales are "asset sales," but a few are "entity sales." The buyer will propose one or the other, likely based on the structure stated in your sale listing. Your accountant and attorney will advise you on the ramifications of either structure for your sale and tax situation.

The price allocation

The buyer may or may not describe a proposed approach for allocating the price but be prepared for this important topic, which greatly affects how sale proceeds are taxed and upon which the IRS requires you and the buyer to agree. Obtain your accountant's advice before discussing or accepting proposals on this topic.

Purchase exclusions or additions

Proposed exclusions or additions to your sale offering can greatly affect your sale proceeds and how they're taxed, and they can also affect the liabilities you retain after the sale closes. Get advice from your attorney or accountant before agreeing to variances.

Due diligence

Most buyers who are purchasing only the assets of a small business can complete due diligence in less than a month. Businesses with real property or extensive physical assets, or those selling as entity sales, often take longer. Be sure the letter of intent states a reasonable due diligence period and that it stipulates that no information obtained during this investigation will be shared beyond the buyer's purchase advisors without your express permission.

Warranties and representations

You'll need to guarantee that the facts you've presented about your business condition are accurate. Be sure your attorney reviews the warranties and representations clause, however, because you want to warrant accuracy to the best of your knowledge, but you don't want to warrant completeness, since there may be conditions of which you honestly aren't aware.

Seller's future involvement

The buyer's proposal may stipulate your after-sale transition-period or ongoing involvement with the business. It may also require you to sign a "covenant not to compete" with the business for a period of time after the sale. Work with your attorney or broker to review the timeframe for future involvement, as well as the timeframe constraints and geographic area defined by the non-competition proposal.

Additional stipulations

Expect the buyer's proposal to state:

• Whether you're required to run the business as usual during the closing period (or whether the buyer asks for major agreements/purchases be put on hold).
• That the offer is nonbinding.
• Cancellation options
• An exclusivity agreement that prevents you from considering competing offers during the due diligence period.