Importance Of Terms When Buying Or Selling A Business

In the initial stages of listing a business for sale, all the attention is placed on getting the business in shape so it presents as strongly as possible, sometimes doing a business valuation to arrive at the most appropriate listing price for the business and discussing the tax implications to the seller of the business. Tom West is the owner of Business Brokerage Press and he has a great saying that most sellers and buyers don’t understand until they get into the negotiations of the transaction and it is – You name the price and I’ll name the terms.

In other words, price is important but the terms of the deal are much more important. And here are some thoughts why.

If a buyer made an offer for all cash and to close the sale in 30 days and another buyer made the offer subject to getting a loan and to close the sale in 60 to 75 days and you are the seller of the business, which offer would you want to accept? If they are both offering the same price for the business it would be a no-brainer to accept the cash offer.

Using the same scenario as above, but the cash offer was 5% less than the offer from the second buyer and you are the seller, which offer would you accept? Your answer would probably be – it depends. Some sellers may be willing to accept the cash offer and close the sale. Some sellers may be willing to accept the higher offer as the price difference of 5% could be more than enough to offset waiting 60 to 75 days to close the sale. Most sellers, I would think though, would include other factors into their decision. Which buyer do they think is more qualified to buy and operate the business? Which buyer would be able to get approval from the landlord to take over the lease? Probably the most important question the seller would want to know, however, if they accepted the offer from the second buyer, is what are the chances the buyer will get their loan application approved? If the seller is not sure the buyer would be qualified, taking the cash offer at a 5% discount may be much more attractive.

In the current economy, the seller must be willing to carry a note for part of the purchase price. Very few buyers have the capacity to pay cash for a business. Also, in simple terms, it’s ‘good business’ for the buyer to use cash as a down payment on the business but then leverage the rest of the purchase price via loans as any interest paid is tax deductible. This also allows the buyer to buy ‘more business’ which means if the business is performing well and throwing off the right cash flow, the buyer can get more cash flow for each dollar of down payment. This is obviously attractive to the buyer.

The terms of a deal don’t just swing on the price and whether or not the seller will carry a note. These are both very critical questions but whether a deal works or doesn’t work can include many things. These include how much free training the seller is willing to provide, if the seller is needed to provide paid training after the free training, what costs are incurred for the business to change ownership and who pays them. For example, using a title company to handle the escrow will incur fees, the landlord may charge a fee to process an assignment of the lease, if the business involves a franchise there may be a franchise transfer fee, how long should the covenant not to compete be in terms of distance and time, and there are many other items.

Buying and selling a business involves many complexities. The longer both parties take to reach agreement on the complexities the greater the chance the negotiations will fail as one or both parties burn out from the inability to reach an agreement.