Small Business Owner: Negotiating Terms With Buyers
by Martin Hansen
As the business owner, your basic documentation is in order, your business location looks good inside and out, you have a range of value for your business, and now you have identified one or more buyers for your business. If you are lacking in any of these critical steps, review our other Small Business Resource articles for expert advice on any subject related to selling a small business. If you have completed the aforementioned tasks, you are now ready to begin the process of negotiating and structuring a deal with the buyer(s).
You have two options:
- The first option is to complete the Term Sheet yourself – the items necessary for a term sheet are below; or
- Option two is to request that the buyer(s) prepare the Term Sheet. Upon completion, ask the buyer(s) to send to you for review or comment
How do you know which option is best? Do you give them your numbers and desired structure, or do you let the buyer(s) submit their offer first? Well, the answer is…it depends on the circumstances. At times, it will make sense for you to submit an offer to the buyer(s) with your desired terms and structure; however, there are times it makes better sense for you to let the buyer “make an offer.”
By the time you get to this part of the “deal,” you will have a good understanding of the deal process and will be reasonably acquainted with the interested buyer. Nevertheless, you should consider having a trusted business advisor (CPA, Business Consultant, Exit/Financial Planner, etc) involved in the process so you can seek advice when necessary.
Deal Terms & Structure
Now, let’s discuss terms and structure. Below is a generally accepted list of items required for a small business Term Sheet that either you or Buyer can draft.
The basic components of a simple Term Sheet:
- Name of the buyer and seller
- Whether the deal is an asset sale or a stock sale
- What is being sold
- Aggregate purchase price number
- Purchase price components
- Other consideration
- Date for the completion of due diligence
- Closing date for the transaction
- Binding or non-binding term sheet
- Signatures and date lines for seller and buyer
By using the list above, you will be simplifying this critical step in the overall transaction. However simple this particular “Step,” may seem, you still may want to consider having one of your team members (CPA or business advisor) take the lead, as their education and experience may give you an advantage. As you know, these professionals can “talk the talk” with any potential buyer, and can assist you with moving the deal forward through this critical term sheet phase.
Generally speaking, there will be some back-and-forth between you and the buyer until both parties get comfortable with the proposed terms and structure. Once the term sheet has been executed by you and the buyer of your choice, you will need to block all other potential buyers from accessing any additional company information as you move into the final “Due Diligence and Documentation” step of the deal.
For a results-driven workflow to guide the entire transaction, including assistance with the process of negotiating terms, consider using DealMaker360. Good luck!