Begin by Gathering Information
The party with the most complete and accurate information has an advantage in a business negotiation. You may think because you’re the seller, that you have all the information about your business, but make sure you know everything that the buyer could bring up as an issue. For example, what liabilities and lawsuits could derail the deal?
Don’t Forget Negotiation Strategies
Selling a business is usually a once-in-a-lifetime event. Even if you think you are a shrewd negotiator, take some time to review negotiation strategies, like knowing your “bottom line” ahead of time and having an ideal sales price.
Negotiate Selling Price
This sounds like it should be a simple number to arrive at, but the selling price is the most difficult part of the negotiation. As you discuss the selling price with a potential buyer, keep in mind that the selling price may be separated into several sections. The first is the price of business assets. What’s the value of these assets? Is the value based on fair market value or an appraisal? Or are the assets of so little value that they are at liquidation (sell-off at a loss) value level? You’ll need to know the purchase price for buildings and land owned by the business. The land and building should also be appraised, and comparable values. The more outside valuation information you can get on the assets, the easier it is to make your case for the value of the business. You’ll also need to know the purchase shares of stock owned by the owner and other shareholders. You need to account for compensation for a non-compete agreement. In many cases, the buyer will ask the seller for an agreement not to compete against the new business (see below). To be fair, the seller should be compensated for giving up potential income for a period of time. But we’re not done yet.
Decide on Contingencies
Contingencies are those conditions that must occur before the sale is complete. Contingencies might include:
Favorable review (a financial audit) of your business financial recordsReceipt of escrow or earnest money deposit by the buyerQualification of the buyer by a lenderAcceptable transfer of building or office leaseAcceptable bank financing for the buyer
Consider Covenants and Promises
Covenants are promises made by the parties to each other. The seller may receive special compensation as part of the “basket” described above in return for one or more of these agreements:
A covenant not to compete with the new owner. not to set up shop near the new owner and steal current customers.An agreement not to solicit employees or customers away from the current business.
In addition, the current owner may be required to make a “business as usual” promise, especially during the sales process. The current owner promises to keep running the business “as usual,” not making any new or unusual agreements, taking on new products or services, maintaining the same business hours and inventory levels, and continuing to provide the same level of customer service.
Review Other Agreements and Promises
Warranties are promises made by the parties to each other. In a business sale, these warranties might include:
An audit of the financial records of the business that shows the records are true and complete The inventory of goods and products is correct The seller has full authority to sell assets and is not in default on any contracts All leases are in good order, all taxes have been paid, all liabilities are current, and there are no liens against any assets that have not been disclosed. All permits, licenses, and certifications are current and valid
Discuss Transition Issues
Other discussions between buyer and seller may include transition issues, such as:
In-progress inventory or customer work.Dealing with ‘hidden’ liabilities that might show up after the sale has closed.Contact with customers - how and when that will be handled, and by whom.Current employees - will they stay or go?Contracts with credit card vendors, other vendors, and how/when to notify these people.
