One of the most common things I've noticed when a founder or CEO sells their company is that they become enamored with the price that they get for the business. The headline, the thing they focus on the most, becomes "I sold it for $XX million!" We even see this in the world of professional sports, where free agents can become obsessed with signing a record contract that has the highest total value, even when it means leaving a team that offered more per year.

While there's nothing wrong with earning the most money you can from your selling your business, you might be overlooking an important component of any deal: the terms. If you only focus on the price, you might actually find that the other party gets the better deal in the end because they were the ones who controlled the terms.

Let me explain what I mean by this.

Let's say that I want to buy your business from you, and your asking price is $50 million. Now let's also say that I agree to your asking price, with a catch: I want to control the terms of the deal. Why? Because in many ways I might end up paying far less than the $50 million for your business.

One example might be that I insert a term in the contract that says I am going to put 20% of the $50 million selling price in escrow- or $10 million- for five years that will only be paid out of certain conditions are met. Depending on what those conditions are, there is a very real chance that you might have just sold me your business for $40 million.

Another example would be where a term of the contract is that I will pay you $30 million at the time of the sale, but that you need to "earn out" the other $20 million based on the company hitting certain financial targets. While those targets might seem reasonable at first, you have to remember that you no longer on control of the business the way you once did- which might make hitting those targets extremely difficult.  You just sold you business for $10 million - sure hope you didn't buy a yacht with that money you will never see.

The point is that there are many ways a buyer can use the terms of a contact, which could also include warranties and representations, to significantly knock down the actual selling price of the business.

That's why if I ever have a choice of owning the price of the deal or the terms, I'll choose the terms every time- even if it means I have to trade some dollars for a smoother transaction and more advantageous terms. Put another way, your focus should always be: your price, my terms.

Here's a pro tip for you: there is a reason why smart buyers or sellers have their attorneys write up the purchase or sale agreement. It gives them the chance to control the terms! And yet, I have seen owners blanche at the $25,000 fee a lawyer will charge them. So when the other party offers to have their attorney draw up the agreement, they're thrilled to avoid the cost and the hassle. Little do they know that they might have just cost themselves some serious money in the long run.

So remember, if you're looking to sell your business- or conduct any kind of serious negotiation- look beyond the price and try to own the terms of the deal. That's how you'll win in the long run.

Published on: Jul 16, 2019
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