How to negotiate the best deal when selling your business: part 2
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, were 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. Weve 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 youll 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.
Jo joined Dynamis in 2005 to co-ordinate PR and communications and produce editorial across all business brands. She earned her spurs managing the communications strategy and now creates and develops partnerships between BusinessesForSale.com, FranchiseSales.com and PropertySales.com and likeminded companies.