The terms of the deal are more important than price.
There is a saying in business brokerage that 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 argue about the price, as that is the first thing both parties focus on. Additionally, both parties know that 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 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 were the seller? An offer from buyer one for $1,000,000 or an offer from buyer two for $950,000? The answer is obvious: 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 is 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?
Offer One Versus Offer Two
What if the offer from buyer one remains the same, but buyer two is now offering $850,000 in cash and wants the seller to carry a note of $100,000 for 10 years at 5% interest?
And so it goes on. There is a vast array of terms that can be included in 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 of the financing in the form of a seller’s note.
- How much down payment is the buyer willing to make?
- The amount of debt the buyer is willing to take on.
- The amount of debt the business can afford to service.
- The tax impact on the seller.
- The tax impact on the buyer.
- How much free training is the seller willing to provide?
- How much free training is the buyer willing to accept?
- How much distance is the seller willing to agree to so that they do not compete against the buyer?
- How much inventory is needed?
There are often many items to negotiate.
There are many items for a seller and buyer to negotiate. They vary with each business, the industry in which the business operates, and ultimately, the goodwill between the seller and the buyer.
One party in the transaction may believe 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 do not have the same motivation, 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? For more information, please visit my website, Business Valuation.
For more immediate assistance, you are welcome to send an email to Andrew Rogerson or call me at 916 570-2674.