Getting the Best Terms When Buying a Business
You have dreamed of owning a business. Now that you have found the right one for you, negotiate to buy the business. You do not want to end up with terms that can ruin your opportunity before you even take over the business. Negotiations will evolve so you must have an open mind and a “can-do” attitude to produce a deal. Think about the points to be negotiated, what your position is and what to say to counter the seller’s comments. Here’s how to make sure you get the best deal when.
Prepare for the negotiation.
Study market dynamics, the competition, raw materials market, and industry statistics of comparable businesses that have sold to come up with the proper valuation. Shop around for interest rates, loan terms, penalties, etc.
Assess your finances and structure payment accordingly.
Know the maximum price that you are willing to pay for the business. Offer the minimum amount that you reached through your own valuation. Provide supporting reasons and proof on how you derived this figure. Ask “what if …” questions to lower the confidence of the seller regarding his or her asking price. Use market fluctuations and economic factors to your advantage. If a third party will finance the sale, make sure the sales deal is contingent on obtaining financing.
Get as close as you can to the seller’s down payment figure but negotiate for some concessions in return. You can ask for reduced interest on the balance of the purchase amount, a grace period of 3 to 6 months on the first payment, no interest for the first year, no penalties on early payments, and the like. When you give something to satisfy the seller, you should get something you need in return.
Consider an earn out.
Earn outs are resorted to if there are valuation differences. For example, if the seller wants a higher price for the business, the buyer can agree to this price by suggesting an earn out, which is contingent on future earnings. Risk is reduced because part of the purchase price is contingent upon productive performance of the business. The buyer usually pays 50 to 70% of the purchase price up front with the remaining 30 to 50% structured as an earn out and paid over a period as the purchased company achieves certain performance criteria, e.g., certain profit or sales level, retention of specific clients or vendors, or other contingencies over a specified period following the closing of the sale.
Have a positive relationship with the people you are negotiating with.
Act in a friendly, fair manner through the way you talk and interact. Do not be confrontational. This will work well for you to produce a mutually beneficial deal.
Seek the help of professionals.
You can rely on advisers – an accountant, a business valuation specialist or appraiser, a , and a lawyer – if you are overwhelmed with a complex negotiation.
Retain key employees and the former owner as a business consultant.
Keep key employees for continuity purposes. After the closing of the sale, let the seller remain for a period of time with salary or some compensation until you get a handle on the business.
Get the seller to sign warranties that the business is free and clear.
Debts and liabilities that the business owes at completion of the sale should remain with the seller. The seller should formally assign all existing contracts to the buyer. He or she should get the consent of the other parties to the contract. The seller must assign the lease and seek the landlord’s consent on the lease agreement.
These written warranties will give you assurance that there are no undisclosed problems or potential problems with the business you are buying. Examples are legal proceedings, insurance claims, and informal arrangements with other parties such as customers or suppliers. Should such issues crop up after the sale, you should have a way out or resort to some legal action against the former owner.
Include a non-compete agreement.
Ask the former management and business owner to not compete with your newly purchased business – a non-compete agreement prevents them from immediately soliciting old customers for a reasonable period of time in a specified area.
Bargain hard and secure the best terms possible. Focus on making a deal always. Do not lose patience, and work through each issue. Be sure you are protected if the business turns out to be not as advertised by the seller. Are you prepared to negotiate and get the best terms on a?