How to Negotiate a Business Sale: Key Considerations and Strategies
When you’ve identified the perfect buyer for your business, one who is committed, financially capable, and prepared to handle your business with care, the next step is to negotiate the terms of the sale. This process can be intricate and requires careful planning. Here’s a guide to help you navigate the negotiation process effectively.
Key Takeaways
- Business owners must consider various negotiating points when selling their company.
- Gathering comprehensive information about the buyer and consulting with advisors is crucial.
- Estimating different facets of the negotiation prices is essential.
- Other factors such as covenants, contingencies, and transition items must be considered.
Begin by Gathering Information
In business negotiations, the party with the most complete and accurate information holds a significant advantage. Even though you, as the seller, may have extensive knowledge about your business, it’s vital to anticipate and address potential issues that a buyer might raise, such as existing liabilities or ongoing lawsuits.
Important Note: Business sales often involve complex transactions, necessitating the assistance of several advisors. Engaging a skilled CPA to review financials and tax implications, as well as an experienced attorney to ensure favorable terms, is highly recommended.
Don’t Forget Negotiation Strategies
Selling a business is typically a once-in-a-lifetime event. Even if you consider yourself a savvy negotiator, it’s prudent to review key negotiation strategies. This includes setting a clear “bottom line” and determining your ideal sales price beforehand.
Negotiate the Selling Price
Determining the selling price can be one of the most challenging aspects of the negotiation. The selling price may be divided into several components:
- Business Assets: Determine the value of business assets. This can be based on fair market value, appraisal, or liquidation value. Ensure you have a clear understanding of these valuations.
- Property and Buildings: Establish the purchase price for any real estate associated with the business. Appraisals should be conducted to determine the value of land and buildings, and comparable values should be considered.
- Other Valuations: Gather as much external valuation information as possible to support your case for the business’s worth.
The “Basket” of Business Price
The total selling price is not a single figure but rather a “basket” of different elements. These may include:
- Stock Shares: The purchase price for any stock shares owned by you and other shareholders.
- Non-Compete Compensation: If the buyer requests a non-compete agreement, compensation should be considered for the potential income you are giving up.
Decide on Contingencies
Contingencies are conditions that must be met before the sale is finalized. They might include:
- Financial Review: A favorable audit of your business’s financial records.
- Escrow Deposit: Receipt of an earnest money deposit by the buyer.
- Buyer Qualification: The buyer’s qualification by a lender.
- Lease Transfer: Acceptance of the building or office lease transfer.
- Bank Financing: Securing acceptable bank financing for the buyer.
Consider Covenants and Promises
Covenants are agreements made by both parties involved in the sale. They may include:
- Non-Compete Agreement: A promise not to compete with the new owner or set up a business nearby.
- Non-Solicitation: An agreement not to solicit the business’s employees or customers.
Important Note: These agreements, often termed restrictive covenants, might also include a “business as usual” promise, where you commit to maintaining the business’s current operations, including hours, inventory levels, and customer service, during the sales process.
Review Other Agreements and Promises
Ensure that any warranties and promises made during the sale are clear and agreed upon. These might include:
- Financial Accuracy: An audit confirming that financial records are accurate and complete.
- Inventory Verification: Ensuring that inventory levels are correct.
- Authority to Sell: Confirming you have the authority to sell the business assets and are not in default on any contracts.
- Liabilities and Taxes: All leases, taxes, liabilities, and liens should be current and disclosed.
- Permits and Licenses: Ensuring all permits, licenses, and certifications are up to date.
Discuss Transition Issues
Address transition issues with the buyer, which may include:
- Ongoing Work: Handling any in-progress inventory or customer work.
- Hidden Liabilities: Preparing for any potential liabilities that might arise post-sale.
- Customer Communication: Deciding how and when to communicate with customers and who will handle it.
- Employee Status: Determining whether current employees will stay or leave.
- Vendor Contracts: Managing contracts with credit card vendors and other suppliers, including notification procedures.
Important Note: To avoid common pitfalls in business sales, review tips for avoiding the top mistakes sellers make.
Negotiating a business sale involves multiple layers of discussion and agreement. By thoroughly preparing and considering all these aspects, you can ensure a smoother and more successful transaction.
