contract_negotiation

The 4 Main Stages Of Negotiating a Purchase Offer

When you’re selling your business the main goal is to receive as many purchase offers in the price range you had in mind when you first put your business on the market. Here’s how to make sure you choose and negotiate the best deal for all concerned…

1. Obtain a Letter of Intent

Letter of IntentFirst and foremost the thing you should be aiming for when presenting your business to buyers is to prompt a purchase offer. In the end you want buyers to put their intentions in writing and that means giving you a letter of intent (LOI) to buy your business.

When this happens you’re going to want to review each one and see how it matches up with your own expectations and goals.

If you’re working with a broker then they will receive the LOI and if not then it will come straight to you.

In many cases the offer first comes in the form of a phone call. When this happens DON’T start talking price, terms or enter into any form of negotiation. This often happens and can cause issues. Instead ask the buyer to put their offer and intentions in writing so you can read through them with your advisor team (even if that’s your spouse!).

Remember the LOI isn’t a legal document nor is it binding. But it should lay out clearly how the buyer intends to purchase the business in terms of financial structuring, terms and purchase conditions.

2. Review the Purchase Offer

MeetingI can assure you that most people are very excited to receive an offer to buy their business but this isn’t the time to start popping the champagne corks (well not just yet!).

Now is the time to sit down with experienced professionals and people you trust and discuss the following points…

The Payment Structure and Proposed Price

In the majority of cases the buyer will offer less than your asking price. Don’t take this personally and accept that this is how the game is played. The buyer’s offer should describe how much of the price will be paid in cash and how much will be finalised in another form of finance, which may include an ‘earn out’ involving the business owner or key team members.

One of the things to bear in mind about the payment structure is how it will affect your tax liabilities and all of this should be discussed with a legal expert and accountant that is experienced in selling businesses.

The Structure of The Purchase

Quite often small businesses are sold as ‘asset sales’. In other words the buyer is just taking the assets of the business such as the equipment, furniture, real estate, inventory, accounts receivables, etc. The actual shares and trading entity is retained by the seller even though by the end of the process it often is worthless.

The other option will for the sale to be an ‘entity sale’. In this case the buyer is taking everything including the legal trading entity and all that that includes.

The key thing to understand is the tax implications of both and that is something that affects the amount of money you walk away with after the sale. So again take advice from the right people in your team on this.

 Due Diligence Period

When a buyer is just buying the assets of a business the due diligence period should be much shorter and in some cases be completed in less than a month. Where the buyer is making a full entity purchase or buying large physical assets and real estate properties then due diligence should be extended. Be aware of this so you agree a due diligence period that is fair on both sides.

 Accurate Representations

When dealing with the offer you’ll need to give guarantees that the facts and representations you’ve made are accurate. Be sure to run through everything with your legal counsel in detail but only ever confirm things to the best of your knowledge as there can often be things that crop up at a later date that you were honestly unaware of at the time.

Future Involvement

This is a negative area for business owners that want to be out of the business for good after the sale. But if a buyer feels the success in the early days is going to be a lot less risky with the business owner involved, you will have to consider this. The key things to think about here is how long they want the involvement to last, what level of involvement they’re expecting and what is the pay off at the end. Again take advice from all concerned, especially family that may have thought the sale was going to be a chance to start a new chapter of their life.

3. Go Back To The Buyer With Any Amendments

Depending on the advice you’ve received from your advisor team, you’ll either accept the buyer’s offer or give them an amended version. In most cases the offer is amended.

But remember this… if you’re going to amend an offer significantly on multiple major points the deal will not likely get to final negotiation.

The key to good negotiations is to quickly see if you and the buyer are aligned on the BIG things. If that’s the case then your amendments will more than likely be accepted or at the very least discussed at the negotiation table.

Where possible let your team of advisors handle the process of going backwards and forwards until things are getting near to completion. This avoids any direct disagreements.

Then it’s a good idea to meet and finalise things round the table with the main players in attendance.

Step 4. Accept The Offer

acceptTo finalise the deal you and the buyer will normally sign a letter of intent (LOI) that reflects the changes that have been made to the deal structure during negotiations. Then if you’re using a broker, they will collect a deposit based on the final purchase price which will be placed in an escrow account. This is usually in the region of around 10%.

If you’re not using a broker then you and your team will have to decide how to proceed and whether to ask for a deposit. If you decide to do this then it’s best practice and fair on all parties to put it in an escrow account, just as a broker would do.

From here due diligence will begin. Many say that’s where all the hard work starts so take a deep breath. But pat yourself on the back for now as you’ve got to a stage most never see which is accepting an offer for someone to buy your business!

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