Negotiating the Sale of your Business – Don’t Separate Terms from Price
A few months ago, I was visiting with a group of business brokers who were sharing cautionary tales of deals that had gone wrong (fortunately none of these were our deals but were real situations.)
One of those tales was about a Seller (we’ll call him Bull) who had built a nice business and was extremely confident in his strategy for selling. Bull is the kind of guy that knows more about most things than just about anyone. He insisted that his broker focus on price and not “get in the weeds” to discuss terms for the deal. He wanted the broker to focus on “one thing” of a $3 million price. The broker was inexperienced and agreed to work with him on this basis. Turns out the price he had in mind wasn’t unrealistic for his business, so they proceeded to prepare and go to market. After a few weeks, the broker was thrilled to find a qualified buyer who agreed to the price. When the broker presented the Buyer, the Bull didn’t want to “rock the boat” by raising issues about terms before he got an Indication of Interest letter.
Bull wanted his broker (and his attorney who was involved now) to add his terms in a counteroffer. Some of the terms were reasonable and some really weren’t, but none of them had been clarified with his broker BEFORE he went to market. He countered with additional terms including:
- Entire payment in cash at closing less minimal escrow
- 3% maximum of the $3 million to be held in escrow for maximum of one year.
- Consulting agreement to keep him on as a “sales executive” with same rate of pay, including bonus and benefits (health, retirement, car, etc.) for minimum one year.
- Employment agreements for his top three employees kept on for a minimum of 2 years with severance if fired for lack of cause during that time.
What do you think happened? You’re right, the Buyer agreed to look at the terms but only for a reduction in the price. Bull was so offended he wouldn’t even consider a counter. Buyer moved on to the next prospect. Bull and his broker never surfaced another offer anywhere close to the $3 million.
Three years later, Bull contacted our broker friend via one of his friends. He shared his sad story and asked if our friend would be interested in working with him in the sale of his business. You can imagine that our friend dug in to find details about what really happened. This time, Bull worked with his new broker to develop a more realistic version of what his ideal deal would be, including both the price and the terms. End result: Bull was successful in selling the business for the same price (even though we had improved the sales and net income) but the new owners were not interested in keeping him on board for more than 90 days. Other terms were also negotiated carefully. Bull was ok with that.
You should know that in any industry, there are “market standard” parameters that most buyers are going to insist upon. There is room for negotiation within some ranges for most of those parameters, but a Seller who insists on, for example, all cash up front, is usually going to end up with a smaller overall payout, or maybe no deal at all. Flexibility on both parties’ parts is key to ending up with the best overall result.
Here are some of the terms that should be reviewed in addition to price:
- What is the timing of the payments?
- How much will the escrow amount be? Held for how long?
- If there are payments to be made based on achieving some results, how are those measured, is there a scale or a cliff? Can missed targets be made up if cumulative results are achieved?
- What is the amount of working capital that will be required?
- Are there any stipulations as to specific key employees (non-owners, but senior) being willing to enter into Employment Agreements with Noncompete clauses?
- Are there any stipulations related to certain customers?
- What are the “deal killers” for that buyer? For example, if there is an environmental issue, will the buyer still be interested?
- Is there a “standstill” requiring the seller to take the company off the market for some period (usually 90 days)?
- What are the representations and warranties that will be expected—are they industry standard?
- What do the parties intend to do about the purchase price allocation?
- Are there any specific tax issues that should be raised with the potential buyer before the seller enters into an agreement (even a LOI that is non-binding will typically include a standstill in our industry).
- And so on…
It’s true that you can’t always get what you want, but your best first step is to think through what it is that you do want in terms of ideal price and terms before you start looking for a Buyer. You might be surprised at what you can get!
If you would like to discuss selling or buying a business or preparing your business for sale, please let us know. In the meantime, if you have questions or comments, I can be reached anytime via email: [email protected] or phone at: 224-688-8838. We’re here to help you harvest your potential.