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How to Negotiate The Buy or Sell of a Business

A Step by Step Guide to Negotiating the Buying or Selling of a Business

How to Negotiate The Buy or Sell of a BusinessThe final objection of the negotiation process is a written agree­ment covering the details of the proposed buy-sell transaction. Some of the details - price, terms of payment, price allocation, form of the transaction, liabilities, warranties - are matters over which the inter­ests and motivations of the buyer and seller may be in sharp conflict. This guide will walk you step by step through all the essential phases of the process of Negotiating the Buying or Selling of a Business.

Table of Contents

1. Negotiation Objectives
2. Negotiating the Price
3. Liabilities
4. Contract Terms
5. A Typical Buy-Sell Contract

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Sample Content

The final objection of the negotiation process is a written agree­ment covering the details of the proposed buy-sell transaction. Some of the details - price, terms of payment, price allocation, form of the transaction, liabilities, warranties - are matters over which the inter­ests and motivations of the buyer and seller may be in sharp conflict.
The seller is interested in:
The best possible price
Getting his money
Favorable tax treatment of gains from the sale­
Severing liability ties, past and future­
Avoiding contract terms and conditions that he may not be able to carry out.
In contrast, the buyer is interested in:

A good title at the lowest possible price
Favorable payment terms
A favorable tax basis for resale and depreciation purposes­
Warranty protection against false statements of the seller, inaccurate financial data, and undisclosed or potential liabilities-
An indemnification agreement and security deposit.
The agreement reached by the parties, if they succeed in reaching one, will be the result of bargaining. Depending on the relative bargain­ing position of the buyer and seller, the buy-sell contract may reflect other compromise or capitulation.

Negotiating the Price
The central bargaining issue in the buy-sell transaction is price. Price is what is actually paid for a business. Value, as distinguished from price, relates to what the business is worth. The decisions of the buyer and seller as to how much to pay or take for each dollar of potential profit are a basis for bargaining, but other factors affect the final price.
In the Regal Men's Store negotiations, The seller was asking $100,000 for his business. The buyer made his own evaluation of the business and offered $66,000. After an extended period of negotiations, The buyer and The seller agreed on a purchase price of $84,000.
What determined the asking and offering prices? How did they finally arrive at the figure of $84,000?

The process of price determination is sometimes described as horse trading. This element is important, and undoubtedly both The seller and The buyer anticipated it in setting their asking and offering prices. But granting that tactics and compromise play a part in price deter­mination, other explanations often account for the relative success or failure in the bargaining process.
Bargaining position. The price paid often reflects the bargaining position of one of the parties. Is the seller's desire to sell stronger than the buyer's desire to buy, or vice versa? The reason behind the decision to buy or sell is important. This would be true of a seller who must sell because of age, health, or personal financial reasons. If the buyer knows that sale of the business is urgent, the seller is less likely to get a reason­able price f or his business, although the reasons bear no relation to the value of the business or the ability of the buyer to pay cash.
The seller's willingness to finance part of the price, or perhaps all of it, will also depend on the urgency of his need to sell. Sometimes a pur­chase price is agreed upon but later raised because the buyer is unable to get outside financing. The price may also be adjusted in order to get favorable tax treatment or in exchange for more favorable terms in other aspects of the contract.

The time factor. Another important factor affecting bargaining position is the time element. When to sell, when to buy. Economic condi­tions cannot be overlooked. The seller is more likely to gain his bargaining objectives when business conditions are good, particularly if his business is sharing the property. During periods of recession­ either general, local, or in a particular industry or activity - the pessi­mistic outlook of both buyers and sellers tends to depress prices.
The buyer. Still another important factor is, "Who is the buyer?” To a person experienced in business valuation, a business may be worth buying only at the liquidation value of the assets. To another buyer, the same business may be the answer to a long-held dream of owning his business.

Liabilities
A buyer generally refers to purchase assets rather than stock for tax reasons, but his preference becomes even stronger because of liability considerations. In the assets transaction, the legal continuity of the sell­er’s business is broken. The seller’s business liabilities are usually not carried over unless the buyer assumes them by agreement.
Buyers often find an advantage in assuming obligations of the seller under leases, mortgages, or installment purchase contracts. The seller may be willing to make some financial sacrifice to the buyer in order to get out from under the payment burden - even though he remains liable for the obligation if the buyer defaults.
But these are known liabilities. It is the unknown that the buyer fears in the stock transaction. Many liabilities, both existing and potential, are unknown at the time of contracting merely because of inadequate investigation. And in any business, there are potential liabilities that neither an honest seller nor a diligent buyer can foresee at the time of the buy-sell transaction. An accident involving a company truck, the fall of a customer on the business premises, or the discharge of an employee may become the basis of a lawsuit and eventual liability, even though many months have passed since the event.

Even more elusive are liabilities that may arise from the manufacture or sale of defective products, patent or trademark infringement, or vio­lations of statutes, and so on. Tax deficiencies may arise out of tax returns filed but audited at the time of the buy-sell transaction.
The price agreed upon in a stock transaction will, of course, take into consideration only known liabilities. The possibility of unknown lia­bilities need not, however, preclude the buyer from entering into a stock transaction. Such a course of action may, in fact, be necessary in order to retain the benefits of non-assignable contracts, leases, franchises, gov­ernment licenses, stock registrations, corporate name, and so on.
The buyer of stock should take precautions against unknown lia­bilities. Ordinarily this would include an agreement on the part of the seller to indemnify the buyer against such liabilities and on some means for satisfying any claims against the seller. Holding part of the purchase price in escrow against such a contingency gives the buyer at least some security.

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