The most important factor in any business transaction is trust. If the seller and buyer can’t trust each other’s word, the deal most likely won’t – and shouldn’t – move forward. Sellers often worry about buyers taking advantage of them, and that’s perhaps natural when you’re selling something you care about so much. But I’ve seen some buyers who have moved the goalpost several times during negotiations, and that’s also a sure way to break trust and kill a deal.
I recently worked with a seller who learned he had to pay off the debt on his vehicles (around $200,000) before the sale could close. “But the new owner will be driving them!” he protested. True, but those are the terms of almost every transaction. I’ve written about this before; I’ve met some owners who assumed the loan payments would just be transferred to the new owner, but that’s not the case. You’re transferring the title of the vehicles to the new owner, and that can’t be done while the bank still holds the title. Therefore, the seller is responsible for the debt.
This owner, who didn’t agree with the terms, then tried to raise the price of the business to make up for the debt he had to pay off. Raising a company’s price by $200,000 is a big deal, even if there aren’t multiples involved in the offer. The added cost of the company pushed it out of range for the buyer, and the seller was back to square one.
A seller can kill a deal in other ways, like changing the rent he’s planning to charge for a building, which can dramatically affect the cash flow and the buyer’s profitability projections. I’ve seen owners change their minds about how long they’re willing to stay in the business under the new owner. That’s their prerogative, of course, but having to hire and train a replacement will also wreak havoc with the buyer’s first-year cash flow. These are not small considerations.
Sellers are focused on their own goals and priorities, and it’s easy for them to forget that a prospective buyer has already invested considerable resources before he gets serious about making an offer. There’s the opportunity cost of deciding to pursue your deal rather than others that may come up. There’s the time and expense of getting financials in order and lining up a lender. They’ve hired professionals to help them with due diligence and negotiation. They’ve put in a lot of effort based on the information in the listing and preliminary talks. It’s simply not fair to change the terms once they’ve begun to negotiate.
That’s why we recommend that every seller work with an experienced business broker. Most will offer a questionnaire and/or in-depth interview that raises questions and issues that will be important to a buyer. There are many ways to structure a deal, and the seller is welcome to set any terms he wants; I just think it’s important that those issues get settled before a company goes on the market.
Understanding the seller’s goals and terms from the very beginning saves everyone time and money. As a broker, I can find the right fit for whatever the conditions are: no seller financing, owner stays on six months or less; the building must be sold along with the business. I will eliminate prospects who can’t work with those terms and find others who can. But when things change, everyone gets frustrated, and deals fall apart.
It’s critically important that owners become aware of all the issues that must be decided and get a chance to think through where they stand on them so they can stand firm. The time and effort the seller and their broker put in before the listing will pay off with a clean and less contentious closing.
If I can help you think thorough your goals and terms for the sale of your business, a good first step is to get a confidential and complimentary opinion of value.
