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Yes it’s easy to get fixated on the sale price. It’s the number you tell people years after the sale if you want to brag. However, much like losing weight, the sale price of your business is only part of the equation. After all, the quickest way to lose 25 pounds is to cut off a leg, but it’s not necessarily the best way.
We all want to get the most money for our businesses, but there are other things we desire as well. Summarized below are the top seven important deal terms when selling a business which have little to do with the business’ selling price:
A Quick Sale
Sometimes a business owner cares more about timing than price, particularly in cases where the owner’s health is a factor, or when family relocates, or in the case of just plain burn out. Imagine for a moment you had to use the restroom and the doorman told you it would be twenty bucks to get in; you might consider paying the price if you really had to go!
A Confidential Sale
While business deals are typically done confidentially to protect the business and its employees, or intangibles such as vendor relationships, the level of confidentiality can go from “pocket listed” (where the business isn’t listed in the traditional marketplaces), to a “blind listing” (where details are teased but not revealed), to completely public.
An All Cash Deal
Cash is King as they say, and many sellers are willing to take less just to avoid the “financial colonoscopy” that can often be the case during the application and vetting of a conventional or SBA loan. Even worse, a buyer may offer something other than cash, like stock in another company.
A Great Successor For the Business
Sellers care about their businesses; they are like their children. A seller may turn down an all cash, over-ask offer for their business if they feel the buyer’s morals or ethics aren’t in line with where they want their business to go.
Selling 100% of the Business
Most sellers in the small business world want to move on to their next adventure, but certain buyers may not want to commit their full time to the business. Time is money, and a buyer may feel his or her money is better spent leaving an owner in the deal. It’s not uncommon to have a seller put forth an offer that is for only part of business.
No Earnout When Selling a Business
Many offers from buyers today include an earn out component which may not be appealing to the seller. Earn out clauses shift some of the risk associated with ownership transition from the seller to the buyer. While this may not necessarily be a bad scenario, sellers often find earn outs difficult to understand and problematic post-closing. An offer which does not include an earn out is almost always welcome by a seller.
Favorable Tax Consequences When Selling a Business May be the Most Important Deal Term
The truly important number a business owner should focus on when selling their business is the net amount of cash deposited into his or her bank account after all of the selling expenses and income taxes are paid. Most business owners do not understand these costs, especially the manner by which taxes will be calculated and paid. For this reason, business owners should involve their CPA before the business is listed for sale.
A good CPA will be able to advise the business owner regarding the type of sale that will result in the least amount of taxes paid after the closing. There are many scenarios which should be considered and negotiated with a buyer which will affect the taxes paid by the seller. Including your CPA in the team of advisors involved with the selling process is wise.
Business sales are complicated transactions involving multiple stakeholders, complex commitments with vendors and employees, and lots of risk and uncertainty on both the buyer and seller side. When it comes the sale price, it’s normally the primary focus of consideration and negotiation, but business sellers do care about other things such as those listed above. And business is all about negotiation and compromise.
Similar to weight loss, success is not just about losing a specific number of pounds, but rather achieving a healthier body over time. There are many options and choices such as cardio versus strength training or fasting versus restricted dieting, which could result in success but in dramatically different ways.
Much like these alternatives to reach a goal of “success” in a diet, I recently had a seller with multiple offers to pick from. To his surprise he found himself strongly considering a lower priced offer because it was “all cash” from a seller with a solid plan he liked to grow his business. The higher priced offer involved some seller financing and an SBA loan which the buyer knew would take much longer, require much more paperwork, and have a higher chance of failing. He also wasn’t feeling as much of a fit from the person coming in with the higher price.
Business deals don’t happen in a vacuum; everything is relative. The seller in my example had a price in his mind before we went to market and imagined that it would be a relatively straightforward deal with a simple exchange of cash for enterprise. It was only when the contrast of price vs terms could be compared side by side that the seller leaned towards the lower priced offer due to the ease of completion and the perceived results of success on the other side of the deal.
To continue the analogy, he thought it would be a short job when in fact it could take some heavy lifting.
This is not uncommon when it comes to the sales of privately held businesses. A skilled business broker or intermediary will walk you through what types of offers may come in so you can decide what you can “stomach” in advance. Much like a well planned weight loss plan, selling a business take time, and knowing what the path to success looks like will get you in shape for your next adventure once your business has been sold.
I have a situation where I am the owner of a small but profitable business that provides services to different customers in particular geographical region. My company is registered as a supplier of a large conglomerate of companies supplying our very own customer approved product lines. While I do well the business is being limited by lack of cash flow, I am having a hard time helping the customers and their growing business for lack of financial support.
A large company – same industry but different geographical area is interested in aiding me but want to add me as an employee,
not a contractor – they want me to stay and manage business as usual, same customer base, and expand the business market using their logistical and financial resources.
What reasons could they have
While another option is to look for investors to help me with financial support I must admit I do require them that, I require more processing power and the logistics support and they have it.
Should I dare become an employee and if so, under what contractual conditions?
First – What type of compensation should I work out with them since not only I am bringing 15+ years of experience and expertise? They want to hire me to manage and expand the business, I am also bringing live business operations, immediate profitability at very low risk of investment. Also I am bringing product lines and very factory beneficial agreements.
How to equate all of these in the compensation?
While I am interested I want you o make sure they don’t want to just steal the assets I am bringing? How to secure a minimum length of employment If they “hire me” , to avoid they hiring me to later dump me and they keep all I have invested in and developed?
Thank for your suggestions or reference to speak to an expert regarding this matter.
If this large company in the same industry is proposing to employ you, how would simultaneously operate your business that needs more capital to grow?
It truly sounds to me, based on what you’ve described, they are indeed trying to steel your assets — and your significant asset in your business — is you!
I suggest you ask them to make an offer for your business purchase and an employment agreement for your continued services.
If they truly want you and your business is profitable, they will make you a fair offer. If not, you know for certain that our hunch is correct!
All the best…
Looking at selling my business. Valuation is agreed but terms are challenging since company that is buying is a funded start-up currently that has about one more year of cash to burn. They are about to seek series A funding that should stretch them, with proper valuation, for another two years. Deal will be 50/50 cash/stock trade. I am comfortable with the risk associated with the stock component but want the cash, to be paid over time and guaranteed in some way. We cant do a traditional installment loan due to optics when raising series A and B rounds. My company is a solid recurring revenue organization base on slower moving technology and a solid customer base, the purchaser is a super hot area of technology that are garnishing crazy multiples for valuation of 20-50x revenue. Again comfortable with risk as I am financial established but want to secure cash components of sale. Creative thoughts welcomed. Thanks.
I assume you mean you can’t do a traditional installment sale (not a loan) where the cash payments would be spread out over more than one year? Yes?
Have you considered a deferred payment where the cash payment doesn’t get paid to you until the Series A funding is secured? It’s not ideal for you because their risk that they don’t get their funding becomes your risk.
If the buyer is going out for Series A funding, they will be aware of your acquisition, regardless of the payment terms. If it makes good sense (and given the multiple of revenue you’ve stated), the PE firms would applaud your acquisition. So, I don’t understand the optics issue you mentioned.
It’s not unusual for PE to provide cash for both organic and growth by acquisition.
Not certain how creative these thoughts may be… Hope they help you.
All the best…
Hey Jim, thanks for the comment. I wanted to comment on your question as a broker since I wrote the post, but I want to refer you to a tax advisor for a specific answer.
Speaking as a business broker; we are in the “matchmaking” business in finding buyers for our sellers, but unless a business broker has the bona fides he or she is not qualified to give tax advice. While we may share stories from experiences that other sellers have had and the advice that their advisors shared for their specific situation, we always encourage our sellers to find out what their best options are for taxes. Things like asset allocation and deal structure do affect what you get to keep, and we can present all offers and work with tax advisors to help our sellers pick the best one for them.
I hope this helps!
I’ve been considering selling my business and have met with a few brokers so far. I’ve asked them how much they think my business will sell for. None of them can tell me how much I will get to keep for my retirement. In other words, they don’t seem to be able to tell me how much tax I will pay when I sell.
Is there a formula for this or maybe a rule of thumb to calculate the income taxes I will owe when I sell my business?