In the first part of this guide to negotiating the best deal when selling your business, we explored the value of professional advice during negotiations, compared asset sales to share sales and gave the lowdown on warranties.
In part two, we’re exploring how deals are structured in terms of finance, non-compete clauses and when vendors are asked to provide assistance for a period after the sale is concluded. We’ve also shared five top tips to negotiate the best possible deal (or no deal at all – which might sometimes be your least worst option).
Often driven by pragmatic concerns about the true viability of a smaller and possibly owner-dependent business, many terms are imposed to minimise the buyer’s risk. Here are some common examples of what conditions you may be asked to consider – each, of course, being very much ‘subject to negotiation’.
A buyer may make a low cash bid for your business in return for a stock option in your favour on the new business. As the seller, this invites you to demonstrate your faith in the future of your company, which will be a source of reassurance for the buyer.
Earn-outs and deferments
An earn-out is a contractual term whereby, as the seller, you accept part of the sale price in tranches as a percentage of future earnings – for example, five per sent of sales over a three-year period.
“This assures that the vendor’s interests are aligned with the performance of the business, but at the same time gives the seller reassurance that they will get any or all or their earn-out,” explains Dan Barrett, director of corporate debt advisory at boutique corporate finance firm CreditSquare.
A big chunk of the sale price will be due upon completion, but if pre-agreed sales- or profit-based milestones are missed, the buyer does not need to make any additional payments.
Typically repaid over three or five years, earn-outs mean the buyer has to find less cash up front and is protected should the business fail to meet expectations. They will therefore be more likely to commit to a higher overall price, albeit it’s not guaranteed you’ll ever receive a portion of the price.
But you can reap rewards should the business perform strongly under new ownership – especially gratifying if you feel your groundwork is the principal or a major factor behind the new owner’s success.
One broker told BusinessesForSale.com that earn-outs are “a very good way of doing deals. If the seller isn’t confident about the future of their business then why should anyone else be? It shows a commitment on both sides, and if other people aren’t lending then it may be the only way forward.”
However, earn-outs add considerable complexity to negotiations and mean you won’t get a clean break from the business.
Bridging the gap between what a buyer is willing and able to pay and the price demanded by the vendor, seller finance is very similar to earn-outs, except additional payments are not dependent on performance. The vendor provides a loan (plus interest) to finance a portion of the price, perhaps grudgingly, but this could be a deal-breaking solution if your business is proving difficult to sell.
“Vendor finance can be a useful mechanism to bridge differences in the vendor’s and buyer’s expectations, so that a deal can be done,” says Dan Barrett. “However, intrinsic to structuring vendor finance is a conflict between the interests of the buyer and seller, so one must carefully calculate the benefits and potential pitfalls of a transaction to make a commercial decision on how to best structure the deal.”
Another broker says it’s a particularly popular tool for businesses with “very little asset, where it’s really about the goodwill of the business.”
Roland Stringer part-financed the purchase of a dating agency, RSVP, himself in 2006. “There isn’t much in the way of assets with RSVP; the value is in the 15,000 lifetime members. It’s therefore quite hard to raise money on and, secondly, we wanted to make sure the vendor remained supportive.”
Continuity of management team and/or owner employment
Your potential buyer might seek guarantees that key employees will stay on. They may even be persuaded to complete a deal if you agree to stay on in an advisory capacity for a specific period – for anywhere between one week and six months –beyond the sale’s conclusion.
Your role – usually undertaken without a wage – might include the provision of training, strategic advice and introductions to key clients.
This option will especially appeal to buyers who lack experience in the industry or running a business generally, or if the business depends heavily on your expertise and relationships with customers.
A BusinessesForSale.com survey revealed that 87 per cent of buyers said a business for sale would be a ‘more attractive’ – with 55 per cent saying ‘much more attractive’ – proposition if its owner committed to such an arrangement.
Non-compete agreements/non-solicitation clauses
The buyer will probably demand that you sign a non-compete agreement, which will bar you from setting up a similar enterprise that competes with your former company for a specified period post-sale. The agreement, which will likely last three to five years, may also prohibit you from poaching the business’s customers or employees.
Five negotiating tips
1. Understand the buyer. What do they want from the deal? Then you can think of ways to give it to them while also satisfying your own needs.
2. Understand the market. Knowledge is power, so ask your advisor about the going price of similar businesses and how deals tend to be structured in your sector.
3. Be prepared to walk away. Galling as it might be after months of preparation and negotiations, you run the risk of being ripped off if you’re not prepared to walk away. So, decide on a minimum price and other ‘red lines’ at the outset.
4. But within these limits, be flexible and prepared to compromise. Though the selling price you achieve is naturally important, the other deal terms can make or break a deal too.
5. And that also applies to the other party. If you’ve made a concession, then you might reasonably ask for a compromise in return – for example if you agree to vendor finance in return for a higher offer.
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