SCORE

THE SELLER'S STRATEGY

There are many reasons you—the business owner—would want to sell your business. Here are some of the common reasons:

  • You are ready to retire but you do not have any successors;
  • Financial demand on the business is greater than you can tolerate;
  • Competition for market share is increasing;
  • Most importantly, growth of the business has stopped.

Note to Buyers: Each of these should be a signal to a buyer to be a very thorough investigator with their “Due Diligence” before committing to purchase a business.

When you—as a seller of the business—come across a prospective buyer, the first thing you should do is evaluate the credibility of the buyer to protect yourself from divulging details that a fake buyer can then use as a competitor or become a competitor to you in the future. Until you have enough confidence the prospective buyer you are dealing with is a valid buyer, refrain from sharing company details, such as financials, tax returns, customer information and/or operational details.

Generally, business sellers require prospective buyers to sign a non-disclosure and non-compete agreement.  In practice, this type of agreement frequently does not turn out to be legally binding depending on how the agreement is written. Nonetheless having such an agreement signed by a prospective buyer may provide you with at least some comfort to continue conversation with the buyer.

Frequently, sellers want to meet their buyer privately and confidentially because they don’t want other stakeholders (bankers, employees, vendors, customers, etc.) to know of their interest in selling the business. This often results in having multiple meetings between the buyer and the seller. As a seller, having these confidential meetings would actually help you gauge if the buyer is financially capable and serious about purchasing your business.

As meeting with the buyer progresses, you would supply him with some relevant details about the business but not sufficient enough to give him information that could be used against you, should he turn out not to be a valid buyer.

After a period of back and forth with the buyer, if you think you have come across a valid buyer and comfortable dealing with him, start revealing more relevant information including the selling price for your business.

If you have come this far, consider it the beginning of real negotiation. At this point, it’s likely that you might have supplied the buyer with other relevant financial details of the business including tax returns to evaluate the selling price.

The Negotiation

This is where the buyer’s leverage comes into play, as the seller is feeling confident that the buyer is real and prepared to sell the business to the buyer.  The seller’s asking price is based on his years of building the business, plus a sum sufficient that will allow the seller to retire and meet other personal considerations.  The buyer has his own purchase price in mind which almost always will be somewhat less than the seller’s asking price for the business.

The pricing discussion now becomes very delicate.  The seller wants to sell the Business and the buyer wants to purchase the Business.  The challenge of course will be the final price settled upon.

Below I provided a checklist for buying and selling a business. But you should have a more complete checklist to avoid “I should have asked that question”.

From the time the first casual conversations are entered to the final purhcase of the business, the time frame will be longer than anticipated.  Steady patience on both sides should be respected.  If either side becomes anxious, then possibly the purchase or sale may not be in either one’s interest.

 

THE NEGOTIATION CHECKLIST FOR THE BUYER AND SELLER

THE BUYER

  • Will you become the operating officer of the business or will you be an absentee owner and hire a professional manager instead?
  • Do you have enough capital to purchase the business along with operating capital if necessary?Or will you require borrowed funds to complete the purchase?
  • How are you going to motivate the seller to accept at the price you are targeting, instead of the seller’s asking price? What terms would you be able to offer to the seller?
  • Understand the financial mechanics of the business to reach a realistic return on your capital investment. This includes knowing where to cut operating costs while maintaining or increasing sales and net profit.
  • A review of all the Stakeholders (Bankers, Investors, Vendors/Suppliers, Employees, Customers, etc.) – who exits and who remains.
  • Will the seller assist with a seamless transition and positively introduce you to all of the stakeholders?
  • Does the company have strong market share, and is growth revenue possible?
  • Are payment terms possible with the seller once the purchase price is agreed upon?
  • If the seller undertakes to satisfy all business liabilities, prepare a legal agreement that indemnifies you from any legal obligations or exposure in the future.
  • Have your attorney to review and make changes to the Sales Agreement, as applicable, and have your accountant to provide a financial operating overview for the takeover of the business.

THE SELLER

  • How is the business being sold:Company [Assets + Liabilities + Good Will], or Assets only, or a DBA [which is a non-corporate entity – the Sole Practitioner].
  • The seller’s attorney prepares clear details about the sale, and prepares agreements that will release the seller from any and/or all liabilities associated with the business including personal business-related guarantees, if applicable, and/or provide indemnity for those liabilities the buyer undertakes to satisfy, to the Seller.
  • Understand the taxes triggered by the selling transaction, including capital gain and small business adjustments, and other related-taxes at both federal and the state level.
  • Create an environment for the buyer to have a seamless ownership change, along with transfer protection for all stakeholders with the seller’s cooperation.
  • Possibly establishing a consulting contract with the buyer for a period of time for you to earn additional income.
  • The terms of payment:One payment, multiple payments, accrued interest during multiple payments.
  • Have a plan for how to meet the checklist items, if the counteroffer from the buyer is lower but acceptable.
  • Have a plan for how not to lose the buyer if the selling price is too high through continued negotiation.

 

About the Author(s)

 Richard  Krelstein

Richard L Krelstein is a SCORE Mentor in Los Angeles Chapter who works with entrerpreneurs for solutions on business strategy and planning, mergers/acquisitions, finance and accounting, management, marketing, sales, manufacturing and customer service and support.

SCORE Mentor, SCORE Los Angeles
The Checklist: Buying and Selling a Business Part II