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How To Sell My Business - 6 Simple Steps To Sell Any Business
Step 1 - Preparation  Step 2 - Valuation   Step 3 - Finding Buyers
Step 4 - Structure The Sale  Step 5 - Due Diligence  Step 6 - Closing

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Step 4 - Structure & Negotiate The Sale

How To Sell A Business & Negotiate
The Financing

 

Many business sales fall through because the buyer and seller make two key mistakes:

1.) They focus the negotiations almost entirely on price

2.) They negotiate one issue at a time

When you first look at the process of selling a business the sheer number of details that need to be agreed upon can make a sale seem impossible.

In addition to price these are just some of the possible items that can be negotiated: structure of the sale (asset vs. entity), the assets to be included, how to handle accounts receivable, non-complete and employment contracts, due diligence, as well as down payment and other financing terms.

The good news is that the more the negotiations can focus on a give and take regarding all these issues simultaneously, the better your chances of getting your asking price (or something very close to it).

No area offers more opportunities to negotiate successfully than when it comes to the details of the financing.

Always keep in mind that when it comes to discussing the details of the financing arrangements:

You want to lower your risk by getting paid ASAP while keeping the payments low enough that the buyer can make payments to you out of the business' monthly cash flow.

 

Let's look at some ways you can arrange the financing in order to make a deal more likely and how to do it without lowering the price:

 

Present The Buyer With Multiple Financing Options

Let's use the example of a business with a selling price of $200,000 where the buyer and seller agree that the buyer will pay $100,000 down and the seller will finance the rest. Below are a combination of different interest rates and time periods that could be used along with the corresponding monthly payments:

 

	5 Years
Interest rate	Payment	Total Of Payments
6%	$1,933	$115,980
7%	$1,980	$118,800
8%	$2,027	$121,620
9%	$2,075	$124,500
10%	$2,124	$127,440

	4 Years
Interest rate	Payment	Total Of Payments
6%	$2,348	$112,704
7%	$2,394	$114,912
8%	$2,441	$117,168
9%	$2,488	$119,424
10%	$2,536	$121,728

	3 Years
Interest rate	Payment	Total Of Payments
6%	$3,042	$109,512
7%	$3,087	$111,132
8%	$3,133	$112,788
9%	$3,179	$114,444
10%	$3,226	$116,136

 

Of course, you want to get paid as soon as possible and if you are like many sellers you will offer a 3 year repayment plan. But what if the buyer has determined that after he pays himself a livable wage there is only $2,000 left from the business' cash flow each month. The lowest payment in the three year plan is $3,042 at a rate of 6%.

If this is the only offer you make to the buyer and he can take it or leave it, he will most likely leave it.

But what if instead of a "take it or leave it" approach, you gave the buyer 3 choices and let him choose one. For example you could offer the buyer one of these three options:

 

	Option 1	Option 2	Option 3
Principle	$100,000	$100,000	$100,000
Term	36 months	48 months	60 months
% Rate	6%	7%	8%
Payment	$3,042	$2,394	$2,027
Total Payments	$109,512	$114,912	$121,620

 

If you present the buyer with just the first option (because it suits your wants) it's likely that the buyer will respond by asking for a price reduction to get the payments in line with his budget. But if you give the buyers all 3 options and let him pick one, you accomplish several things:

1.) You get the focus off of price (the principle remains $100,000 in all 3 options)

2.) You give the buyer an option that meets his stated requirements thereby increasing the chances that, instead of asking for a price concession or making a counteroffer, he will just pick the 3rd option.

3.) You are improving the tone of the entire negotiation process by offering a "concession" by allowing the buyer to pay you back over a longer period of time.

(Any time you make a concession you always want it to be acknowledged by the buyer. You should say something along the lines of: "Bill, when I planned my retirement I was counting on having all my money out of the business in three years, but if it's what it takes to make the deal, I'm willing to give you up to two more years to pay me off")

4.) You are getting compensated for making this concession because you will be paid a higher rate of interest if the buyer pays you back over a longer time period. You will receive an extra $12,108 in this example if the buyer picks option #3 over option #1.

 

Any Issues Regarding The Financing Can Be Bart Of The
Choices You Present

The options don't need to be limited just to rate and number of months either. We have already covered the steps you can include in the financing contract to make sure you get paid.

You can adjust, add or delete some of these items if it suits your needs.

For example, if the buyer pays you back in 36 months you may want to require that the loan be secured with 30% of his personal assets and the remaining 70% will be secured by the business' assets. As the term lengthens, so does the amount of the buyer's personal assets he must put up to secure the loan - a 48 month term could require the buyer to put up 50% of personal assets and a 60 month term 70%.

Another element you may want to include is an acceleration clause, but you may choose to require it only if the buyer opts for a longer repayment period.

Using the example of the $100,000 loan from above, the options you present to the buyer may become more detailed:

	Option 1	Option 2	Option 3
Principle	$100,000	$100,000	$100,000
Term	36 months	48 months	60 months
% Rate	6%	7%	8%
Payment	$3,042	$2,394	$2,027
Total Payments	$109,512	$114,912	$121,620
Acceleration Clause	No	Yes	Yes
Amount Of Personal Security	30%	50%	70%

 

The buyer may well come back and say he likes Option #3, but wants the interest rate from Option #1. In fact, that type of response is likely. But if you can come to an agreement on that one issue (either justify the 8% rate or settle on some type of compromise) you've settled an entire group of details at once.

One thing you want to avoid is presenting the buyer with options that bring into play things that have already been agreed upon in previous negotiations .

In the example above, the buyer and seller have already agreed on a price of $200,000 with a down payment of $100,000. If, when trying to work out the other details such as interest rate, the seller proposed an option with a different price and/or lower down payment, that would not be good for the negotiation process.

It would create a sense of uncertainty between the negotiators: "Are the things we have already agreed to solid or are they going to change tomorrow?"

Be creative as you need to be when negotiating, but don't reopen issues that have already been settled.

Bring Non-Financing Issues Into The Mix

There is no reason why the discussion about the financing should be separated from all the other agreements that make up the sale that have yet to be settled.

If it's appropriate in your situation, you can offer to lower the interest rate by one point in exchange for a more lucrative consulting agreement.

Or you may agree to extend the payment term from 48 months to 60 months in exchange for the buyer giving you a less restrictive non-compete clause.

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Next: Step 5 - Manage The Due Diligence Process

 

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