Price or Terms? What's More Important | O'Keeffe & O'Malley

Price or Terms…What’s More Important?

Dec 09, 2020

One might think that price is the most important factor when selling a business, but the terms of the sale are equally important. Under normal circumstances this is the case, but when a business has survived an unusual situation (tired of the word pandemic?), terms can become even more important.

First let’s talk about price. It’s very important to be clear on exactly what is included in the sale. Be clear on what assets, liabilities and working capital are part of the transaction. Once the price is determined, the terms should be defined. Terms could be paid in cash, a note payable at a specific interest rate over a period of years, an earn-out paid based on future sales or milestones, a royalty payment or other special arrangements.

Often a price can be significantly higher if the terms are more favorable to the buyer, or lower if the terms favor the seller. If your business has had a difficult time over the last nine months, it may be in your best interest to get creative or consider generous terms, such as an earn-out based on future performance. This demonstrates to a buyer that you have confidence in the future of the company and that you’re willing to keep some skin in the game. There are many different ways to approach the terms and your M&A advisor is best equipped to negotiate the best outcome for you.

Creative terms can be the answer to putting a deal together, so it’s important to know what your options are. For example, if the SBA will be involved in financing the business, one needs to consider what is disallowed. At the present time, earn-outs, partial sales, seller employment agreements and consulting agreements beyond 12 months are not allowed on SBA 7a loans. We stay on top of ever-changing guidelines so we can advise our clients accordingly.

O’Keeffe & O’Malley negotiates the details of each transaction early on in the process so that our clients have a clear understanding of the price and terms, as well as the allocation of the purchase price to maximize after-tax proceeds.

Call us today for a confidential consultation about your specific situation at 913.648.0185.