What to Negotiate in Addition to Pricing When Selling a Business

When selling a business, the amount offered is essential, but the transaction terms can be equally important.

You receive an offer of $5M for your SME. A few days later, you receive another offer of $5.5M. At first glance, the decision seems easy. However, the highest offer is not necessarily the most advantageous.

What is included in the transaction, the time at which you’d receive the funds and the obligations that you’d retain following the sale can make a big difference. Before accepting an offer, you should look beyond the proposed price.

Does the price offered actually reflect what you’d receive?

A buyer could offer an appealing amount, but it may not necessarily correspond with the sum you’d receive. In addition to the value attributed to your company, several elements must be examined.

• The organization’s retained liquidity.
• Outstanding debts.
• Assets included in or excluded from the sale (the building, for example).
• Working capital to retain in the company.

You should pay particular attention to working capital. Generally, the buyer and seller agree on a target level required for the organization’s normal operations. Where the working capital is lower or higher than this target at the time of closing, the price could be adjusted as a result.

Therefore, the challenge involves knowing what you’ll actually receive once all the factors have been considered. The transaction structure can also have tax consequences that will impact the net sale proceeds.

When and how will you be paid?

When you take payment terms into account, two offers of the same amount can be very different.

A portion of the price may be paid at the time of closing and the remainder staggered in the form of a sale price balance. Certain amounts may also be retained to cover potential claims related to guarantees given by the seller.

The buyer may also propose a conditional price supplement (or earn-out). Based on your situation, an offer of $5.5M where $1M is contingent on achieving certain targets could be less attractive than a proposal of $5M with the majority payable at the time of closing.

Your level of involvement following the sale should also be considered. If you leave the organization, you’ll have little control over its future performance. A situation where a significant portion of the proceeds depend on results that you can no longer influence is a riskier option.

What role will you retain following the sale?

The buyer may want you to remain in the company to facilitate the transition. However, you can negotiate certain elements.

• How long you’ll remain in the organization.
• Your level of involvement.
• Your responsibilities.
• Your compensation.

You could also consider a gradual transition where you’re more involved during the initial months and then less present over time.

Addressing these factors early in the discussion phase is preferable. Waiting until the transaction is almost concluded could reduce your leeway if your expectations don’t align with those of the buyer.

Which obligations could you be responsible for after the transaction?

Closing the transaction doesn’t necessarily mean you’ll be free from all responsibilities. You may be required to provide representations and guarantees regarding the company’s finances, contracts, taxes or specific activities.

Depending on the agreement, if a declaration turns out to be inaccurate, the buyer could claim compensation. Therefore, it’s important to be fully aware of your company’s circumstances before making any such commitments.

A due diligence process conducted by the seller allows them to pinpoint certain issues in advance and, where possible, resolve them. It also helps the parties to better understand the risks associated with providing representations and guarantees.

Can selecting a buyer also make a difference?

If you’re selling only a portion of the organization, choosing a buyer can also be a deciding factor. A strategic buyer capable of creating synergies, opening up new markets or accelerating the company’s development could increase the value of your retained participation.

Therefore, the best offer is the one that best aligns with your objectives and not necessarily the one with the highest sale price.

Why define your priorities before receiving an offer?

In order to effectively negotiate your business sale, you must first determine what matters to you.

• Would you like to receive the largest proceeds possible at the time of closing?
• Are you prepared to receive payments over several years?
• Do you want to step down from the organization quickly or continue to play a role?
• Would you prefer a predetermined amount or a conditional portion that could be more profitable?

These choices depend on both your personal objectives and the transaction. Financial planning can help you determine your needs following the sale and evaluate the resulting proposals.

Give this some thought before receiving offers. Then you can negotiate based on the chosen priorities rather than as you assess proposals. To move forward, find out more about the main steps to follow when selling your SME.

How can we help you?

Our experts can guide you with preparing your business for sale, analyzing an offer’s financial parameters, determining a working capital target and conducting seller due diligence.

Are you considering selling your business? Contact us!