You Set the Sales Price and I Will Set the Terms
Regardless of what you are selling the price and terms are key to making the transaction successful. When buying a house the sales price brings the buyers to the table but then financing, cost allocation of repair work, fee sharing, warranties, etc. (referred to as terms) is what will either make or break the deal. The same is true when selling a business. The sales price starts the negotiations but the seller financing options, list of assets included in sale, fee sharing, non-compete and continuation agreements, etc. can make or blow the deal.
I am working with a small, family run business that is quite successful and who is considering selling their business. I say “consider” because they do not have to sell it right now so they are evaluating the potential sales price vs self perceived worth. Like all of us business owners we have a self determined worth we have put on our business. This takes into consideration our knowledge of the business valuation process, the effort we put into starting the business and the after tax cash we would receive if we did sell it. Value and worth are very different and is usually in the eye of the beholder. The biggest challenge in negotiating a business sale is the difference between the seller’s view of worth and the buyer’s view of value.
This business is the typical husband/wife combo with a few employees and the owners are getting tired of working all the time. They make good money but are becoming burned out so they wanted to look into possibly selling it.
When I met them, and before I reviewed their financials, I asked them how much they wanted to sell their business for. They told me $500,000 and explained how they came up with the price. Quickly followed after their response was them looking for my opinion of that price. My answer was short and surprised them a little. I told them that they set the price and I set the terms.
What that means is that I can sell their business for $500,000 if the terms are right. If they are willing to work for 5 years for free under the new management, if they are willing to take $10,000/yr for 50 years or they have assets in excess of $500,000 that the buyer will get free and clear of debt. This is an extreme example of how terms can make/break the deal.
The husband was very quick in his response and that was that there were no terms available in this deal. Only an all cash offer and 30 days transition for them will be expectable. WOW! Now that just made the deal much, much harder to sell.
As I explained they have a mom/pop shop that realistically the buyer will be another mom/pop. Most people don’t have $500,000 cash in the bank and financing will be required. The current commercial lending market is very tight (to say the least) and it would be unrealistic that no seller financing would be required to make the deal. If the sellers are unwilling to finance any part of the deal then the number of potential buyers just went down significantly.
If they are looking for all cash deal then the type of buyer they are looking for is an investor type. Unfortunately they do not have any key employees to run it and the company has not shown it can survive without the owners involved in the day to day operations. Investor type business buyers are not owner-operating entrepreneurs. They are looking for cash flow company’s that can run themselves with limited management requirements.
The bottom line is simple economics of supply and demand. The less number of buyers (lower demand) usually means a lower sales price. I gave them two choices to think about as they evaluate the sale of their business. Either fire themselves and show the potential investors that the company can run without the owners involved in the day to day operations or sell it to another owner/operator and know that seller financing will be required. I’m not saying that these are the only two choices available but are realistic considerations that need to be evaluated when it comes to selling their business.
Remember, it only takes one buyer to sell your business but be honest with yourself before you go in so you are better prepared for the multiple opportunities.
