Jan 20, 2016
One would think that the price would be the most important point in selling a business, but price and terms are both important; the price and the terms really go hand in hand. How do you feel about a $10 million purchase price for your business? Now consider how you feel about the terms of $1 million down and the balance paid based on a percent of revenues over the next 10 years? Not as good.
What are terms? Terms could be paid in cash, a note payable, at a specific interest rate, a number of years of payments, an earn-out paid based on future events or sales amounts happening in the future, a royalty payment, a specific dollar amount paid each year, having collateral or no collateral, personal guarantees, etc.
Also very important to the price is what is included in the price, what amount of working capital (cash, receivables, inventory, other current assets, accounts payables, accrued expenses, other current liabilities) and other assets and liabilities are part of the price or terms of a transaction.
Often a price can be a lot higher if the terms are more favorable for the buyer (note, earn-out) or lower if the terms are more favorable to the seller (cash). The seller’s priorities will determine which is the best option.
In sell-side situations when we are not involved we often see a buyer tell a seller early on what the seller wants to hear. The buyer may quote a very attractive price for the business, such as $5 million, $10 million or $25 million, but fail to detail the terms of the deal. Then the buyer will try to negotiate terms that may not favor the seller later on in the process, after the business has been taken off the market, or after employees have been made aware of the sale.
Sellers should get very specific early on with the details of a transaction. It’s important not to just focus on the price or terms, but to clarify both. A seller should even hone in on the allocation of the purchase price, as it can significantly impact a seller’s after-tax proceeds.
Call us for a consultation on your specific situation at 913.648.0185