Negotiating the Sale of Your Business
Considerations to Discuss With Your Purchaser
You have found the perfect buyer for your business (that is, a willing person, who will take good care of your business, and who has the cash or loan money to make the deal happen). Now it's time to negotiate terms.
Most business sales are complicated transactions, and they require the help of a CPA/tax adviser/attorney for both parties. To help you sort out the general flow of the process, here are some possible questions in which you will need to come to terms:
Negotiate Selling Price
This sounds like it should be a simple number to arrive at, but the selling price is the most difficult part of the negotiation. As you discuss selling price with a potential buyer, keep in mind that the selling price may be separated into several sections:
The price of the business assets. What's the value of these assets? Is the value based on fair market value or an appraisal? Or are the assets of so little value that they are at liquidation (sell-off at a loss) value level?
A purchase price for buildings and land owned by the business. The land and building should also be appraised, and comparable values.
The more outside valuation information you can get on the assets, the easier it is to
A purchase of shares of stock owned by the owner and other shareholders
Compensation for a non-compete agreement. In many cases, the buyer will ask the seller for an agreement not to compete against the new business.
To be fair, the seller should be compensated for giving up potential income for a period of time.
The Basket of Business Price
As you can see, the selling price is not just one number. It's a "basket" of different possibilities, depending on how the buyer and seller can come to terms.
For example, the buyer might say, "Your equipment is worthless.
I'm going to have to bring in all new equipment." And the seller might respond, "That equipment will do the job for years."
And on and on, around and around, until both parties have come to an agreement on the basket, including all of the elements of the sale.
But we're not done yet.
Decide on Contingencies
Contingencies are those conditions which must occur before the sale is complete. Contingencies might include:
- Favorable review of your business financial records
- Receipt of escrow or earnest money deposit by buyer
- Qualification of buyer by lender
- Acceptable transfer of building or office lease
- Acceptable bank financing for buyer
Consider Covenants (Promises)
Covenants are promises (sometimes called restrictive covenants) made by the parties to each other. In a typical business sale, these covenants might include:
A covenant not to compete with the new owner
The current owner's "business as usual" promise, in which the owner promises to keep running the business "as usual," not making a new, unusual agreement, maintaining the same business hours and inventory levels, and continuing to provide the same level of customer service.
Review Representations and Warranties
Warranties are promises made by the parties to each other.
In a business sale, these warranties might include:
- The financial records of the business are true and complete
- Inventory of goods and products is correct
- The seller has full authority to sell assets and is not in default on any contracts
- All leases are in good order, all taxes have been paid, all liabilities are current, and there are no liens against any assets that have not been disclosed.
- All permits, licenses, and certifications are current and valid
Discuss Transition Issues
Other discussions between buyer and seller may include transition issues, such as:
- In-progress inventory or customer work.
- Dealing with 'hidden' liabilities that might show up after the sale has closed.
- Contact with customers - how and when that will be handled, and by whom.
- Current employees - will they stay or go?
- Contracts with credit card vendors, other vendors, and how/when to notify these people.