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Recognize Unrealistic Terms and/or Structure
Deal structure, asset allocation and tax management must be addressed proactively and early in the process. Often the Buyer and Seller place all of the focus on the sale price at the expense of the ‘net after-tax results’ of a business
In most cases, a seller could achieve a deal that provides a greater economic benefit when an experienced Tax Attorney/CPA assists with structuring the transaction. In addition to structure there are a number of other issues that could
be problematic, including:
• Seller insists on all cash at closing and is inflexible in negotiating other terms
• The buyer’s unwillingness to sign a personal guarantee
• The lack of consensus on the Asset Allocation
• Seller insisting on only selling stock (typically with a C-Corp)
• Inability to negotiate equitable seller financing, an earn-out, or terms for the non-compete
Deal Structure – Payment Terms
If you’re wondering how to sell your business quickly,
the answer may be offering payment terms
that create a win-win situation for both you and the buyer.
The purchase price is only one component of the deal. The structure of the deal, or payment terms, is equally important and there are many things to consider such as the tax implications of various deal structures, the type of entity
involved (C corporation, S corporation, LLC), whether it is an
asset sale or stock sale, liabilities assumed by the buyer, current assets retained by the seller and more. You really need to consult the professionals on your business sales team and figure out what payment terms
are best for your situation.
With that said, every sale will involve some combination of debt, equity, seller financing (deferred payment) and possibly an earn-out. There are many creative ways to structure a deal and it pays to be open minded. In general, the
more favorable the terms, the higher the purchase price, the less favorable the terms, the lower the purchase price.
For example, an “All Cash / No Seller Financing” transaction would command the lowest purchase price and a “No Cash / All Seller Financing” transaction would command the highest purchase price.
Although every seller would like to simply show up to the closing and receive a big fat check for the entire purchase prices, the truth is this rarely happens.
The majority of all transactions involve some amount of seller financing. Even if your buyer goes through the rigorous process of obtaining an SBA loan, the SBA will require you, as the seller, to take back a note for a portion of
the purchase price and that note will not be paid off until the SBA loan has been repaid.
Now this is not all bad news. A creative deal structure can create a win-win situation for both parties and allow you, as the seller, to achieve your desire goal. For example, seller financing offers a few potential benefits. First,
it will give you a bigger audience of prospective buyers and possibly a higher sale price.
If a seller is willing to offer financing, it tells the buyer that you have confidence that the business is strong and it will continue to provide a return sufficient to cover the repayment of the seller note.
Second, if you do not have an immediate need for cash, the return you will earn on the note you have provided to the buyer will be significantly higher than the return you would receive by simply depositing those funds in the bank.
Finally, spreading the payment over a number of years vs. taking payment in one lump some may provide some tax benefits by placing you in a lower tax bracket.
This is not at all meant to be tax advice, but something you should be aware of and discuss with your team.
When considering a buyer note, it is important that you feel confident the new team running your business has the experience and know how to do it successfully. If things do not go as planned, you will not get paid on the note and
you will be back running your business because it will have been pledged as security for the loan.
An earn-out is another useful tool that can be used to bridge the gap between differences of opinion on the value of your business. If you feel your business is worth $2,000,000 and the buyer feels your business is only worth
$1,700,000, is the deal dead?
Not necessarily, if you are creative and open minded. Let’s say the buyer agrees to give you $1,700,000 plus 10% of all revenues in excess of $3,500,000 for the next 5 years. If the business continues to grow, you will not only have
successfully sold your business, you will end up receiving more than your original asking price!
The point here is that there are many ways to structure a deal and achieve your goals. If a dream buyer walks into your office and offers all cash, well hey, that’s fantastic! But know that it is not all that common and it
may pay to be a little flexible.
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