Mergers & Acquisitions...
Merfeld & Schine, Inc.
Selling Your Company, Step 11:
Negotiate Details of Acquisition Offer
Usually an initial letter of intent is not immediately accepted by the seller. Typically, the parties would come together with the business broker to work out the details of the deal. Areas of difference would be addressed and (hopefully) settled to the satisfaction of both parties. As seasoned dealmakers, we will most likely have substantive suggestions to bridge any differences between the parties. A big part of our job is figuring out strategies to erase obstacles.
Price is only one of the areas of negotiation. In the sale of a closely held business, there are several areas that offer opportunities for moving a deal closer to fruition.
Invariably, there are a number of details that need to be worked out in the sale of any business. A lot of these details are specific to each business. However there are some issues that need to be addressed in almost every business sale. These include:
Will the sale be an asset or stock sale?. It can make a significant tax difference to buyer and seller. See Transaction Structure for a detailed explanation.
In all probability, the deal will include a non-compete agreement, prohibiting you from competing with the buyer for some period of time after you sell your business, in a defined geographical area.
All Cash vs. Some owner Financing
Business buyerís, even those with plenty of cash, strongly prefer to pay part of the selling price over time Understandably, business sellerís often prefer (and sometimes insist on) all cash. Our advice is to be flexible: consider the entire offer. It will probably be easier to attract good prospects and to make a deal, if you donít start out by insisting on cash only. You may in fact, end up with a better deal too: For example, look at these two scenarios for the sale of a business:
$2MM all cash at closing.
$2.4MM with $1.8MM upon closing, and $600,000 over 30 months with 6% per year interest.
Some business sellers might choose the first scenario, and some might choose the second. There are other factors to consider, like the buyerís credit worthiness, whether there is security, etc. If the risk of not getting paid is small, Scenario B might well be the better deal.
This example may be a bit simplistic, but it doe illustrate the point: you should at least consider deals that include some owner financing.
Selling a company is a complex transaction. Within that complexity lies opportunity; issues to work with toward putting a deal together. Over our years as business brokers, we have learned several ways to fashion a win-win deal.
Most business sellers agree to (and most business buyers insist that) the current owner assist in the transition to the new owner. This period can be as short as a month or two, or as long as a couple years (or longer by mutual agreement). Itís important to get an agreement as to the period that you will be obligated to remain with the new owner. It is also an area that can be negotiated as a bargaining chip toward making a deal to sell your company.
Consulting by Business Seller
Ongoing advice from the seller can be most beneficial to the buyer. Sellers are usually happy to provide consulting on an ongoing basis. This is often an area that can help make a deal happen. Typically, the seller is paid a reasonable rate for consulting.
Allocation of Purchase
The acquisition price for the sale of the business is allocated in varying proportions to inventory, business equipment, consulting by seller, non-compete agreement, and goodwill. The way the allocation is done has tax implications for buyer and seller.
Unfortunately, sometimes what is good for the seller tax wise, is bad for the buyer, and vice-versa. Usually, the allocation of the sale is negotiated between the buyerís and sellerís accountants. Adjustments can be made in the allocation toward fashioning a win-win deal.
Periodic Payments (Taking Back Paper)
The timing of payments (assuming the deal is not for all cash upon closing) is an area of opportunity for bridging other differences in a buy/sell negotiation. Although sellers often prefer an all cash deal, there are some good reasons that you should consider taking some of the payment over time.
Every business acquisition deal involves a good amount of back and forth negotiating about issues large and small. As seasoned business brokers, we can help with the negotiations, and put out the inevitable brush fires as they come up.
Next step: Binding Letter of Intent
Back to Summary of the Selling Process page
We focus on (but do not entirely limit to) companies with sales in the $1MM to $20MM range located in the New England States: MA, CT, NH, RI, VT, ME.
If any of our M&A services fit your needs, please feel free to contact us for a free consultation without obligations or sales pressure. Fill out this simple form or call us (401-751-3320)
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