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FAQs About Negotiating the Price, Terms and Structure of Offers

Negotiating the price terms and structure of an offer

 

How are negotiations handled when selling my business?

We act as the intermediary in the negotiation process. Philosophically, we try to hammer out as many details as possible in the offer/negotiation stage of a transaction.  There is nothing worse than going down the road with a buyer with a lot of open issues, only to have the deal fall apart on unresolved concerns.  Our Standard Offer to Purchase document helps to identify issues that should be addressed and settled during the offer stage of a transaction.  If a deal is going to collapse on unresolved issues, it’s best to have it fall apart during the initial negotiations, not six weeks later.  Why waste time?

As the intermediary, we strongly recommend that all negotiations, offers, and counter offers be presented in writing.  Doing so helps to eliminate misunderstandings and miscommunications.  It can take a fair amount of time for the buyer and seller to reach agreement on the various terms of an Offer to Purchase Agreement.  It’s not unusual to have multiple counter offers before an agreement is reached.

 

Will we leave negotiating room in the asking price of the business?

We prefer to set an offering price for the business at the top end of the valuation range and defend the price.  It’s a strategy that has proven to be successful as most of our clients end up with offers at full price, or very nearly so.  When the offering price is set at the right level, we can convince prospective buyers that the business is fairly-priced and if they are not interested at the asking price, we will have other buyers who will recognize the business offering price is justifiable.  When priced right, we will defend your price to the maximum extent and you can expect to receive a full-price, or very near, full-price offer.

Overpriced businesses are a huge problem in the business-for-sale marketplace.  Far too many inexperienced brokers accept overpriced listings knowing the business will only sell for much less.  We do not accept listings if the business owner has unrealistic expectations.  Simply stated, overpriced businesses never sell at the asking price.  It is usually a waste of time, but you run the risk of a confidentiality breach because the business is on the market for so long.  It is also a very painful process for sellers as they slowly reach the realization that their expectations are unrealistic.  In addition, qualified and experienced buyers, who have been down the path of trying to acquire an overpriced business from a seller with unrealistic expectations, learn their lesson and simply stop looking at overpriced businesses.

 

What types of items are subject to negotiation when an offer is received?

In addition to price, there are many terms of an offer that are subject to negotiation.

The overall structure of a transaction is negotiable.  Will the deal be structured as an asset sale or a stock sale?

A buyer may ask for seller financing.  Not only is seller financing itself negotiable, the specific provisions of seller financing, such as the amount, the term length, interest rate and security,  are all negotiable.

The terms of a non-compete agreement are negotiable.  The extent of the seller’s commitment to helping train the buyer after closing is negotiable.  The timing of allowing the buyer to contact a landlord, franchisor, customers, employees, or other third parties is negotiable.  The allowable time frame to pursue due diligence, financing, and permits is negotiable.  The assumption of accounts receivable, liabilities, certain types of contracts and work-in-progress can be negotiable.  Expectations for due diligence can be negotiable.  The amount of inventory to be included in the sale can be negotiable.  How inventory is to be counted and valued can be negotiable.  How warranty issues are handled can be negotiable.  Specific legal language, such as representations and warranties, within the Offer can be negotiable.  The amount of Earnest Money and its disposition can be negotiable.

Consider the above as a partial list.  There are many more possibilities.  However, our Standard Offer to Purchase Agreement helps resolve many of these issues.

 

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Should I expect to receive low-ball offers?

As your agent, we must present to you any offers that are received.  Despite our best efforts, some buyers may insist on making a low-ball offer to establish their negotiating position.  So, yes, you may receive a low-ball offer.  The best way to respond is with a full-price counter offer and see if the buyer becomes serious or is just wasting everyone’s time.

 

How will buyers make an offer on my business?

We always encourage buyers to use our Standard Offer to Purchase Agreement because it addresses a lot if issues that may be otherwise overlooked.  We cannot make buyers use our forms.  But, if they offer a Letter of Intent, or a term sheet, both of which are much less detailed, we will recommend that you counter their offer by using our Standard Offer to Purchase Agreement.

 

Are offers made on pre-written, standard forms like residential real estate offers are?

Hopefully, yes.  We do have standard forms developed by our attorney and we encourage prospective buyers to use our forms.

 

Can I get all cash in the sale of my business?

These days it’s rare to receive all cash, but it’s not impossible.  Because of our knowledge of SBA financing, if anyone can get you all cash, it’s us.  The keys to receiving all cash is having the business priced right and having a business whose acquisition can be financed with a SBA 7a loan.  To achieve that, the business cannot have significant obstacles that almost force seller financing.

However, it’s not uncommon for SBA lenders to request or require seller financing in the area of about 10% of the purchase price.

 

How will the buyer finance the purchase of my business?

Many of our transactions are financed with SBA 7a loans.  When we list your business, we should have a pretty good feel for whether a SBA loan might be possible.  If the purchase price cannot be financed with a SBA loan, buyers have other options, including traditional lenders, their own savings, friends and family, etc., but chances are you may also have to participate in financing a portion of the purchase price.

 

Will I have to finance a portion of the selling price?

Please see the two questions/answers immediately above.

 

Will an offer contain contingencies that can kill the deal?

Yes, any offer will have contingencies.  The contingency to perform detailed due diligence on the business is usually the one that creates problems.  The key to surviving due diligence is to disclose any known issues on the front end.  If undisclosed issues arise in due diligence, it will almost certainly kill the deal because the buyer loses faith and trust in the seller.

There will also usually be a contingency by the buyer to obtain financing for the acquisition.  If the buyer is unable to do so, the deal will be at significant risk.

There will likely be other contingencies, but the due diligence and financing contingencies are the top two deal-killers.  We help evaluate, identify and minimize risks that might terminate a transaction.

 

Will I be paid for the goodwill of my business?

By definition, goodwill is the value of an ongoing business in excess of the fair market value of its assets.  It’s really a math calculation.  We are selective in the businesses we represent.  In most instances, if we are willing to take on your listing, there will be goodwill.  What it really means is your business generates enough cash flow for the valuation to exceed the value of its assets.

 

Will I have to train they buyer of my business? If so, for how long?

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Will I be paid for training the buyer?

Our Standard Offer to Purchase Agreement states that the value of the training is included in the purchase price.  If the buyer has expectations for a much longer training period, it would not be unreasonable to require additional compensation.  At any rate, this is a negotiable item.

 

Will I have to continue working for the buyer of my business as an employee or as a consultant?

Your involvement in the business post-closing is a negotiable item.  It’s not uncommon for the buyer to request the seller provide consulting for a definitive time frame with specific duties, or to request the seller to be available for consulting on an as-needed basis.  It is unusual for the buyer to retain the seller as an employee.  If the consulting request is over and above the training that is typically provided by a seller, it would be reasonable to expect to be fairly compensated.

 

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If you have a question, send an email to jim@bizowneradvisors.com.

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FAQs about Business Exit Planning Considerations

FAQs about Business Brokers

FAQs about Listing Agreements and Fees

FAQs about Business Valuation

FAQs about Confidentiality, Advertising and Disclosures

FAQs about Business Buyers

FAQs about the Business Sale Process

FAQs about Facility Leases and Owned Real Estate

FAQs about Assets Included in a Typical Business Sale

FAQs about Due Diligence

FAQs about Seller Financing

FAQs about SBA Loans for Business Acquisitions

FAQs about the Business Sale Closing Process