How vital are terms and conditions when selling a business?
In the initial stages of listing a business for sale, all attention is focused on preparing the business so that it presents as strongly as possible. This may involve conducting a business valuation to determine the most appropriate listing price for the business and discussing the tax implications with the Seller. Tom West, the owner of Business Brokerage Press, has a great saying that most sellers and buyers don’t understand until they get into the negotiations of the transaction: “You name the price, and I’ll name the terms.”
In other words, price is important, but the terms and conditions of the deal are much more critical. Here are some thoughts on why.
If a Buyer made an offer for all cash and to close the sale within 30 days, and another Buyer made an offer subject to obtaining a loan and closing the sale within 60 to 75 days, and you are the Seller of the business, which offer would you want to accept? If they are both offering the same price for the business, it would be a no-brainer to take the cash offer.
Are terms of a deal important when selling a business or buying a business?
Using the same scenario as above, but with a cash offer 5% less than the offer from the second Buyer, and you are the Seller, which offer would you accept? Your answer would probably be – it depends. Some sellers may be willing to take the cash offer and close the sale. Some sellers may be willing to accept a higher offer, as the 5% price difference could be more than enough to offset the wait of 60 to 75 days to close the sale.
Most sellers, I would think, would include other factors in their decision. Which Buyer do they feel is more qualified to buy and operate the business? Which Buyer would be able to get approval from the landlord to take over the lease? Probably the most crucial question the Seller would want to know, however, if they accepted the offer from the second Buyer, is what are the chances the Buyer will get their loan application approved? If the Seller is unsure whether the Buyer is qualified, taking the cash offer at a 5% discount may be more attractive.
In the current economy, the Seller must be willing to carry a note for part of the purchase price. Very few buyers can pay cash for a business. Also, in simple terms, it’s ‘good business for the Buyer to use cash as a down payment on the business but then leverage the rest of the purchase price via loans, as any interest paid is tax deductible. This also allows the Buyer to purchase ‘more business,’ which means that if the business is performing well and generating the right cash flow, the Buyer can obtain more cash flow for each dollar of down payment. This is attractive to the Buyer.
Terms and conditions do matter.
The terms of a deal don’t just hinge on the price and whether the Seller will carry a note. These are both very critical questions, but whether a deal works or doesn’t can depend on many factors.
These include the amount of free training the Seller is willing to provide, whether the Seller is required to provide paid training after the free training, the costs incurred for the business to change ownership, and who pays these costs. For example, using a title company to handle the escrow will incur fees, the landlord may charge a fee to process an assignment of the lease, if the business involves a franchise there may be a franchise transfer fee, how long should the covenant not to compete be in terms of distance and time, and there are many other items.
Buying and selling a business involves many complexities. The longer both parties take to reach an agreement on the complexities, the greater the chance that the negotiations will fail, as one or both parties burn out from the inability to reach a consensus.
Are you thinking about selling your business? Would you like to know the value of your business? For more information, please visit my website, Business Valuation.
For more immediate help, you are welcome to send an email to Andrew Rogerson or give me a call at (Toll-Free): (844) 414-9700
