Importance of Terms When Buying or Selling A Business

In the preliminary stages of listing a business on the market, all the attention is placed on getting the business in shape so it presents as strongly as feasible, sometimes doing a business valuation to arrive at the most appropriate listing cost for the business and discussing the tax implications to the seller of the business. Tom West is the owner of Business Brokerage Press and they has a great saying that most sellers and buyers don't understand until they get in to the negotiations of the transaction and it is - You name the cost and I'll name the terms.

In other words, cost is important but the terms of the deal are much more important. And here are some thoughts why.

Using the same scenario as above, but the money offer was 5% less than the offer from the second buyer and you are the seller, which offer would you accept? Your answer would probably be - it depends. Some sellers may be willing to accept the money offer and close the sale. Some sellers may be willing to accept the higher offer as the cost difference of 5% could be over to offset waiting 60 to 75 days to close the sale. Most sellers, I would think though, would include other factors in to their decision. Which buyer do they think is more qualified to buy and operate the business? Which buyer would be able to get approval from the owner to take over the lease? Probably the most important query the seller would require to know, however, in the event that they accepted the offer from the second buyer, is what are the chances the buyer will get their loan application approved? If the seller is not sure the buyer would be qualified, taking the money offer at a 5% discount may be much more stunning.

If a buyer made an offer for all money and to close the sale in 30 days and another buyer made the offer subject to getting a loan and to close the sale in 60 to 75 days and you are the seller of the business, which offer would you require to accept? In the event that they are both offering the same cost for the business it would be a no-brainer to accept the money offer.

In the current economy, the seller must be willing to over a note for part of the acquisition cost. Only a few buyers have the capacity to pay money for a business. Also, in simple terms, it is 'good business' for the buyer to make use of money as a deposit on the business but then leverage the remainder of the acquisition cost by loans as any interest paid is tax deductible. This also allows the buyer to buy 'more business' which means if the business is performing well and throwing off the right money flow, the buyer can get more money flow for each dollar of deposit. This is obviously stunning to the buyer.

The terms of a deal don't swing on the cost and whether or not the seller will over a note. These are both critical questions but whether a deal works or doesn't work can include plenty of things. These include how much free training the seller is willing to provide, if the seller is necessary to provide paid training after the free training, what costs are incurred for the business to change possession and who pays them. For example, using a title company to handle the escrow will incur fees, the owner may charge a fee to process an task of the lease, if the business involves a franchise there could be a franchise transfer fee, how long ought to the covenant not to compete be in terms of distance and time, and there's plenty of other items.

Purchasing and selling a business involves plenty of complexities. The longer both parties take to reach agreement on the complexities the greater the chance the negotiations will fail as or both parties burn out from the inability to reach an agreement.