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. But much like losing weight, sale price 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.
Why would business owners accept a lower offer price when selling their business? They have 7 good reasons!
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.
Neal’s strengths include matching buyers and sellers, pricing businesses, and negotiating deals.
He is an MBA, CBI, ABI and serves on the boards of the Carolina Virginia Business Brokers Association (CVBBA) and the Better Business Bureau of Eastern NC. He’s lived in Garner for 15+ years and is an active member of the Garner Chamber of Commerce. He enjoys cycling and spending time with his wife Vivian.
Latest posts by Neal Isaacs
- Top Seven Important Deal Terms When Selling a Business - September 12, 2018
- How to Successfully Acquire A Business In A Seller’s Market - August 6, 2018
- Commercial Lease Assignment When Selling Your Business - July 31, 2018