The Importance of the Terms of the Deal
The terms of the deal are more important than price. There is a saying in business brokerage we share equally with buyers and sellers and it is “Get the other party to name the price and you name the terms.”
The logic is simple. The buyer and seller tend to initially battle about the price as that is the first thing both parties tend to focus on plus both parties know if the other party is serious, they are in a negotiation. If you are therefore in a negotiation it is necessary to test the other party and the best way to do that is to go backwards and forwards.
When selling a business or buying a business however, the price is important but what is more important is the terms of the deal. Which would you prefer if you are the seller? An offer from buyer one for $1,000,000 or an offer from buyer two for $950,000? The answer is obvious that you would prefer the first offer.
However, let’s tweak that a little. If the offer from buyer one is $1,000,000 with a down payment of $100,000 and the remaining $900,000 an SBA loan repaid over 25 years at an interest rate of 5% compared to buyer two who is offering all cash for $950,000?
What if the offer from buyer one is the same but buyer two is now offering $850,000 cash but wants the seller to carry a note of $100,000 for 10 years at 5% interest?
And so it goes on. There is a huge combination of terms that can go into a deal. Deal points can include:
- Whether the business would qualify for an SBA loan.
- If the buyer would qualify for an SBA loan.
- If the seller is willing to carry some finance in the form of a sellers note.
- How much down payment the buyer is willing to make.
- How much debt the buyer is willing to take on.
- How much debt the business can afford to service.
- The tax impact to the seller.
- The tax impact to the buyer.
- How much free training the seller is willing to provide.
- How much free training the buyer is willing to accept.
- How far the seller is willing not to compete against the buyer.
- How much inventory is needed.
There are many items for a seller and buyer to negotiate. They vary with each business, the industry the business is in and ultimately the goodwill between the seller and the buyer.
It can happen that one party in the transaction thinks they have more leverage than the other. This is generally not the case as when you boil it all down, it is rare that either the buyer or the seller MUST close the transaction. To close a transaction, both buyer and seller must be motivated. If both parties are not genuinely motivated then the deal will collapse.
Price is important in the negotiations of the sale of a business but it is generally nowhere near as important as the terms of the deal. Negotiating the terms of the deal takes time and patience. However if the amount of time it takes is too long it will ultimately lead to the deal collapsing as too much time means that one party in the transaction is not motivated enough to want to close the deal.
Are you thinking about selling your business? Would you like to know the value of your business? If you would like 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 on 916 570-2674.