Selling a Business When It’s Not For Sale:
21 March 2022: Selling a Business When It’s Not For Sale: The Negotiations
Remember the final statement in last week’s post on Selling a Business When It’s Not For Sale: The VALUE? If not, here it is: “A lawyer that represents himself has a fool for a client.”
So how is that relevant to our topic for this week? Because by simply replacing the word “lawyer” with “business owner” the statement is equally true.
The veracity of that comment notwithstanding, there are lawyers who will insist on representing themselves – just as there are business owners who think they can represent themselves when selling their business.
In fact, lawyers have an advantage over business owners insofar as they know the law, legal strategy and legal processes and have spent years in the profession. Business owners, on the other hand, are for the most part clueless about nearly every aspect of selling a business. Many think that, because they’ve been negotiating with clients and vendors for years for the purchase or sale of trucks, lumber, steel, widgets or services, they can negotiate anything.
It’s our experience that this just ain’t so.
But we recognize that some things are inevitable and that some business owners are bound to try. In this, the third installment of Selling a Business That’s Not For Sale, we offer the following topics under the headline, “The Negotiations”; what to consider when someone – perhaps someone like us – shows up saying, “We represent a buyer for your business.”
Well, I can hear a lot of “DUHs!”
Of, course price gets negotiated. But how the amount is to be paid is another matter.
Will there be financing? Almost certainly. Will the seller provide any? There’s at least an 80% chance. You don’t want to agree to a number before you know how that number will be paid.
Why? Because financing costs. If you buy a car and finance the purchase, that financing costs you an additional 5%-6%. If you finance the purchase of your business for the buyer, you’re taking on some risk and you should be compensated for that.
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When a seller provides some financing, it’s usually in a secondary position. That is, the buyer was able to get X% of the purchase price (above the amount of cash the buyer puts in) from a bank or other similar lender and looks to the seller for the balance. If trouble arises, the seller is the last party paid.
The terms of payment are an important part of the negotiations. You should know what you’ll be walking away with – which brings us to the next issue: TAXES.
The tax man LIVES for the days when businesses are sold. No matter how much money a government – local, state, provincial, federal – brings in, it’s never enough to feed that beast.
How a sale is structured from a tax perspective impacts both buyer and seller. Negotiating a deal structure that will not only minimize the seller’s tax liability but that will also be acceptable to the buyer after considering their tax concerns is a fairly intricate dance that requires top-notch advice from knowledgeable tax specialists as well as excellent negotiators that can get the other side to see what you need – and to make sure that you understand what they need.
Deals that were otherwise sailing smoothly to closing, have been scuttled on the shoals of any number of tax codes when the parties, dealing directly with one another, dig in unrelentingly. Everybody walks away pissed off as the deal sinks below the surface.
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Representations and Warranties
When a business is sold, the transaction generally includes various representations and warranties made by the parties.
For instance, the seller will be required to attest the truthfulness of everything that has been presented to the buyer. The seller will make “representations” as to certain conditions, both financial and physical, litigation, notices, etc. Some of these can be negotiated.
But just as important is that the buyer will – or should – be required to make certain representations to the seller, not least being that the buyer is a legitimate entity, has the authority to enter into the transaction and that the person(s) signing for the buyer has been authorized to do so. In addition, many acquisition agreements contain a representations from the buyer as to potential legal conditions that might otherwise interfere with the buyer’s ability to complete the deal..
Ongoing Seller Participation
How much time will the seller be required to spend during the transition period and how will the seller be compensated? How will such compensation, assuming there is some, be treated? Earned wages? Consulting? The answers significantly impact the tax liability of the seller.
Does the transaction involve and “earn-out” where the amount the seller eventually receives depends on the business’ performance during a defined period of time post-closing? If it does, this impacts not only tax liability but the actual selling price of the business.
An earn-out also raises the question of control. Will the seller, whose total compensation depends on the performance of the business, retain enough control over the operations to provide a realistic opportunity to meet or exceed the performance levels that will trigger the future payments?
The Bottom Line
The sale of a business requires negotiating countless issues, large and small.
How are the payables and receivables to be divided? What are the terms of the financing note(s). Who will be providing the guarantees – and are those guarantors financially strong enough to make their guarantee meaningful? How will obsolete inventory be handled? Will the buyer require a non-compete agreement from the seller? If so, to what extent both geographically and chronologically?
Running and growing a business by itself takes someone superbly talented at juggling the myriad demands of that business. A business owner that tries to sell his or her business as a DIY project is, by definition, taking time away from running their business, a condition that will almost guarantee that the business will lose value. How many balls do you have in the air at any given time?
Packaging, marketing, vetting buyers, negotiating terms, etc,. etc. takes time and, unless the business owner is wise enough to hire the right talent, that time can only come from the time the owner would otherwise be spending running and growing their business – and keeping it in peak condition to enjoy the highest value.
Finally, a statement taken from last week’s post that business owner’s should always keep in mind:
The DIY business owner would be wise to consider that negotiating a Two or Three Million Dollar offer is like going to court; you could represent yourself but it’s generally much wiser to hire a professional. If you’re approached by a potential buyer and you have no realistic idea what your business is worth, you stand a good chance of getting beaten up during any subsequent negotiations.
As if to underscore that point, I read something recently about a couple of studies that suggest that hiring an advisor can add up to 20% to the selling price of a business. And if that’s not motivating enough, remember this old saw from the annals of the legal profession: “A lawyer that represents himself has a fool for a client.”
Next week’s post on selling a business when it’s not for sale will be about “due diligence” – and what to expect when it starts.
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
We continue to receive inquiries from small private equity groups for industrial services businesses. This weeks’ group is looking for U.S.-based providers of such services that have between $1M and $5M in discretionary earnings.
If any of you know of something that might fit, please let me know.
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The author is the founder of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 1,000 in the world. He can be reached at joe@WorldwideBusinessBlog.com