Negotiating the Sale of Your Business

Considerations to Discuss With Your Purchaser

Business people shaking hands in conference room
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You have found the perfect buyer for your business (that is, a willing person, who will take good care of your business, and who has the cash or loan money to make the deal happen). Now it's time to negotiate terms. To help you sort out the general flow of the process, here are some possible questions that you and the buyer will need to deal with.

Most business sales are complicated transactions, and they require the help of several advisors for both parties. Get a good CPA to look over the financials and the tax implications of the sale, and, most of all, you will need an experienced attorney to make sure the terms of the deal are what you want.

Begin by Gathering Information

The party with the most complete and accurate information has an advantage in a business negotiation. You may think because you're the seller that you have all the information about your business, but make sure you know everything that the buyer could bring up as an issue. For example, what liabilities and lawsuits could derail the deal?

Don't Forget Negotiation Strategies

Selling a business is usually a once-in-a-lifetime event. Even if you think you are a shrewd negotiator, take some time to review negotiation strategies, like knowing your "bottom line" ahead of time and having a

Negotiate Selling Price

This sounds like it should be a simple number to arrive at, but the selling price is the most difficult part of the negotiation. As you discuss selling price with a potential buyer, keep in mind that the selling price may be separated into several sections:

The price of business assets. What's the value of these assets? Is the value based on fair market value or an appraisal? Or are the assets of so little value that they are at liquidation (sell-off at a loss) value level? 

A purchase price for buildings and land owned by the business. The land and building should also be appraised, and comparable values.

The more outside valuation information you can get on the assets, the easier it is to make your case for the value of the business.

A purchase of shares of stock owned by the owner and other shareholders

Compensation for a non-compete agreement. In many cases, the buyer will ask the seller for an agreement not to compete against the new business (see below). To be fair, the seller should be compensated for giving up potential income for a period of time. 

The "Basket" of Business Price

As you can see, the selling price is not just one number. It's a "basket" of different possibilities, depending on how the buyer and seller can come to terms. 

For example, the buyer might say, "Your equipment is worthless. I'm going to have to bring in all new equipment." And the seller might respond, "That equipment will do the job for years."

And on and on, around and around, until both parties have come to an agreement on the basket, including all of the elements of the sale. 

But we're not done yet.

Decide on Contingencies

Contingencies are those conditions which must occur before the sale is complete. Contingencies might include:

  • Favorable review (a financial audit) of your business financial records
  • Receipt of escrow or earnest money deposit by the buyer
  • Qualification of the buyer by a lender
  • Acceptable transfer of building or office lease
  • Acceptable bank financing for buyer

Consider Covenants (Promises)

Covenants are promises (sometimes called restrictive covenants) made by the parties to each other. The seller may receive special compensation (part of the "basket" described above in return for one or more of these agreements:

  • A covenant not to compete with the new owner. not to set up shop near the new owner and steal current customers.
  • An agreement not to solicit employees or customers away from the current business.

In addition, the current owner may be required to make a "business as usual" promise, especially during the sales process. The current owner promises to keep running the business "as usual," not making any new or unusual agreements, taking on new products or serices, maintaining the same business hours and inventory levels, and continuing to provide the same level of customer service.

Review Other Agreements and Promises

Warranties are promises made by the parties to each other. In a business sale, these warranties might include:

  • An audit of the financial records of the business that shows the records are true and complete
  • Inventory of goods and products is correct
  • The seller has full authority to sell assets and is not in default on any contracts
  • All leases are in good order, all taxes have been paid, all liabilities are current, and there are no liens against any assets that have not been disclosed.
  • All permits, licenses, and certifications are current and valid

Discuss Transition Issues

Other discussions between buyer and seller may include transition issues, such as:

  • In-progress inventory or customer work.
  • Dealing with 'hidden' liabilities that might show up after the sale has closed.
  • Contact with customers - how and when that will be handled, and by whom.
  • Current employees - will they stay or go?
  • Contracts with credit card vendors, other vendors, and how/when to notify these people.

Finally, take a look at these tips for avoiding the 5 biggest mistakes business sellers make.