Every business acquisition will involve some form of negotiations before the process is done. The negotiating phase can be difficult and the final result may be radically different from the original deal. If a business owner is not prepared to properly negotiate, he could lose a deal, or settle for a lesser deal, and not even realize it. That’s why it’s so important to know what you want to achieve before you begin negotiations.
The best deal does not always mean the one with the highest price. The structure of a deal is always part of the negotiations. From all-cash transactions to owner-financed arrangements, deal structure is a major factor of negotiation. In addition to sales price, the following are points that can be used to negotiate the best overall deal.
Allocation of Sale Price
Go over allocation areas (such as fixed assets, goodwill, consulting, non-compete agreements, employment contracts, and real estate) with your CPA and determine the potential tax implications before you even start negotiations. A good CPA will help you determine a mix of variables that represent the best sale price.
Promising deals that were ready to close have failed because the seller had not prepared properly. It is crucial to get a CPA involved early to fully understand the tax liabilities. A good CPA can help you structure a successful deal.
Handling Assets and Liabilities
Accounts Receivable and Accounts Payable are variables that can provide negotiating points. Assuming balance sheet items can allow a buyer to purchase your business with less cash out of pocket. That can translate into a higher sale price.
An earn-out provision is a tool that can overcome a deadlock on sale price negotiations. An earn out basically provides that in a specified number of years after the sale, if cash flow (or gross profit for example) stays the same as at the time of sale, the seller gets 100% payment on the owner note. If cash flow drops by a certain percentage, the owner note is reduced by that same percentage.
Asset vs. Stock
If a business is incorporated as a C-corporation or as a sub-S corporation, the buyer and seller must decide whether to structure the deal as an asset sale or a stock sale. An asset sale is the purchase of individual assets and liabilities, whereas a stock sale is the purchase of the owner’s shares of a corporation. A CPA and an attorney who specialize in business acquisitions should assist a seller through this area.
A non-compete agreement reduces a buyer’s concern and disallows a seller’s ability to return to the industry. A non-compete agreement can have a number of negotiating points such as the length of time, distance parameters, or range of industry positions in which the seller agrees not to compete against the buyer.
Length of Training
The seller and buyer can negotiate a period of time in which the seller agrees to train the buyer and/or be available for phone consultations. If an extended period of training is needed, the parties can negotiate compensation.
If the earnest deposit is viewed as a good faith gesture rather than a negotiating point, it will not be an issue in the deal. There is no set formula to determine the optimal amount of escrow money that accompanies a purchase contract.
Conventional banks are sources of funds for lines of credit, real estate, and asset based financing. In the small business arena, conventional financing may not be available unless the buyer has personal assets to collateralize the loan for a sale price heavily based on asset value.
The Small Business Administration (SBA) is a federal agency that will guarantee a portion of an approved loan.
The sale price on SBA deals may not be as high as owner financing, but if a business qualifies, this can be a good option. Be sure the broker you select has SBA contacts who aggressively utilize this financing tool.
Owner financing is another means of selling to the right buyer. This method of financing carries many considerations and negotiating points, but it can spread taxes over time and create an income stream for the seller.
A competent negotiator will be unemotional, open minded, and fully understand the position of both sides at all times. He or she know there are many ways to successfully resolve issues and negotiate a good deal.