Negotiating the Price Gap Between Sellers and Buyers When Selling a Business

Business Brokers

Negotiating the Price Gap Between Sellers and Buyers When Selling a Business

While most sellers prefer all-cash transactions, business sales frequently necessitate some form of seller financing. Furthermore, sellers who insist on all-cash deals usually get a lower purchase price than if the deal was structured differently.

Regardless of whether or not buyers can pay cash at closing, they frequently prefer to structure a deal in which the seller has left some portion of the price on the table, either in the form of an earnout or a note. In the event that the owner has misrepresented the business, deferring some of the owner’s remuneration from the transaction will provide leverage. An earnout is a payment mechanism that is based on future performance.

Buyers like to suggest that if the business is as described, this type of pay-out should not be a problem. The owner’s response is that he or she knows the business is sound under his or her management, but is unsure whether the buyer will be able to run it successfully.

Moreover, the owner has already taken a business risk by owning the company; why should he or she continue to be at risk with someone else in charge? It is essential to understand that if the buyer is not satisfied with the deal structure, they will not proceed. Nonetheless, there are times when an earnout can be extremely beneficial in recognizing the full value of a business and can help with closing a transaction.

Assume a company spent three years and large sums developing a new product and had just launched the product at the time of sale. The current business could be valued, and an earnout structure could be devised, to compensate the owner for the time and money spent developing the new product if and when sales of the new product materialize. Everyone wins in this scenario.

The terms of the agreement are vital to both parties involved in the transaction. Often, the buyers and sellers, as well as their advisors, agree on all of the terms of the transaction except the price. Although a price difference may appear to be a “deal killer,” the price difference can often be resolved so that both parties can move forward with the transaction.

The following are some ideas for closing the price gap:

If the seller originally included real estate in the deal, he or she may choose to rent the property to the acquirer rather than sell it outright. This reduces the transaction price by the value of the real estate. The buyer may also choose to pay a higher rent in order to reduce the “goodwill” component of the sale. The seller may also elect to retain ownership of certain machinery and equipment and lease it back to the buyer.

A subsidiary can be formed for the fastest-growing segment of the acquired business. The buyer and seller can then split 50/50 ownership of the “spun-off” portion of the business until the original transaction is completed.

Revenue, gross margins, EBIT, or EBITDA can all be used to structure a royalty. This is typically less difficult to structure than an earnout.

Certain assets, such as automobiles or non-business-related real estate, can be excluded from the sale in order to reduce the overall purchase price.

Although the suggestions mentioned above will not solve all of the pricing gap issues, they may refer participants in the right direction to do so. The ability to structure successful transactions that satisfy both buyer and seller necessitates a significant amount of time, skill, experience, and, most importantly, imagination.

To ensure a successful transaction, it is recommended that you work with a team of experts, including M&A Advisors, Transactional Attorneys, and Business CPAs. If you are looking for a Business Broker, The Transworld Business Brokers is your destination. Certified Business Broker Moche Hazout and his team not only have the expertise and training of selling a business, but they are also fully aware of the market share for businesses in your field and can also suggest the best value for your business.

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