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If you’re gearing up to sell your business the first Big Question spinning in your head: ‘How much can I sell this business for?’
Now the actual sale price is important, and it’s easy to get swept up in the exhilaration of raw numbers when you’re ready to cash-out. After all, you’ve invested more blood, sweat, and tears into your business than can possibly be quantified.
But the sale price is just a piece of the puzzle, not the whole picture. And selling a business is much different than selling almost anything else.
You may have even pictured yourself haggling over your business like selling a car: The buyer makes a few offers, you do a little back-and-forth, but at the end of the day you have your “final price” – and you won’t go lower. In reality, there’s more to selling a business than negotiating a price and shaking hands.
In this article I’ll explain why only focusing on price is a major mistake when negotiating the sale of your business – and I’ll go over 3 “fine print” deal terms that you must prioritize to create the best outcome for yourself as an owner.
There’s an old saying when it comes to buying businesses:
“You name the price, I’ll name the terms.”
To explain we’ll go back to the car analogy:
Imagine you’re selling your car.
You take a few photos, upload them to the internet, write out a description of the vehicle, and post it online. You know your vehicle is solid and you have no qualms about waiting for the right buyer.
Then the exact same day a buyer offers $1000 above your asking price.
At first glance, this is a no-brainer. But then the buyer says something strange:
They will buy the car right now – in CASH – on a few conditions: YOU must cover all maintenance and repair costs for the next TEN years!
Oh, and you can’t access any of the money until after the 10-year period.
After any maintenance and repairs are paid you’ll get to keep what’s left.
Is that still a good deal?
No. And it might sound strange in this context, but when selling a business this is exactly how you turn an otherwise good deal into a nightmare deal… fast.
At this point you’re likely telling the buyer who “generously” offered an extra $1000 to take a hike. You know you can find a more reasonable buyer out there.
But in the world of selling your business, a cash buyer ready to cut a check with no strings attached is rare.
And lawyers drafting “fine print” – that make part of the purchase price conditional on outcomes post-sale – is more common than you might think.
If you can navigate the delicate dance of sale price and terms, you’re likely to walk away with a better outcome than you would if you focused solely on the sticker price.
On the flipside, these deal terms can be used against you if you don’t take them seriously and if you don’t understand the nitty-gritty of how they work.
Now I’m going to spell out three common deal terms. First I’ll give you the “legalese” – this is how a lawyer may describe them. Then I’ll bring them into the real world.
Let’s dive in:
Fine Print Deal Term #1 – Indemnities
In our car example, you are assuming a huge risk on behalf of the buyer.
10 years is a long time and there’s a good chance any car would need significant repairs.
That being said, are you likely to keep that extra $1000 you’re making on the actual sale price? Doubtful – one major engine repair can set you back $3000 or even $5000.
Our car example sounds extreme but what the buyer actually wants is quite clear: He wants “insurance” that he won’t end up “screwed” after the sale. To that end, we might ease his concerns by offering to replace the engine if it happens to blow up within 6 months of the purchase.
This is what a lawyer may refer to as an indemnity.
An indemnity can be thought of as insurance where the buyer of your business is entitled to remuneration – or compensation – if a certain outcome takes place.
Now a reasonable business buyer will understand that they can’t remove all risk. But at the same time, all buyers have their “deal breakers”.
And some of the most common deal breakers are contingent liabilities or potential liabilities that may occur in the future.
You may choose to resolve these so-called “deal breakers” by offering indemnities to the buyer.
For example, if your business sells gift cards the buyer may be scared off. After all, they could be left with the bill if they’re redeemed once your business is sold.
To set your buyer’s mind at ease you can offer to indemnify them by stating if those gift cards are used after the business is sold you will reimburse them.
In essence, you remove all risk associated with that particular “deal breaker”.
But how do they know you’ll take care of these costs? How can they be absolutely sure you’re “good for it”?
Simple:
You will put their mind further at ease using…
Fine Print Deal Term #2 – Escrow
The general concept of escrow is this: Money is set aside and held for a specific (and reasonable) time period by a third party and under set conditions the buyer can draw on this.
After the set time period, the remaining cash is disbursed to the seller.
For our car analogy this slots right in: Instead of keeping the full purchase price for 10 years
You may agree that $2K could be held in a separate account and accessible to the buyer if and only if the engine explodes.
This way they can be assured that this repair will be taken care of if it does happen…
And if it doesn’t the would-be repair money is then transferred to you the seller.
A great example of when an escrow account can be used in a business sale: Transfer of vehicles’ titles.
Here’s the snag – your buyer wants vehicles’ titles transferred before they hand over any cash and you’re not about to give up those keys without getting paid.
This is where an escrow account can make life easier for both of you.
An attorney will hold a pre-agreed amount related to the title transfers in escrow.
Your buyer can relax if the titles aren’t transferred they’ll get their money back.
Once you’ve transferred the titles you’re paid from escrow. Everyone is happy.
Now if these fine-print terms are starting to sound like a lot of headaches…but with zero protection on your end? Allow me to introduce…
Fine Print Deal Term #3 – Liability Cap
Liability Cap is what it sounds like: A “cap” or maximum amount on the liabilities you would cover.
Liability Cap is also the main reason why the car analogy doesn’t make a lick of sense from a seller’s perspective:
If the car repairs far exceed the amount of profit you make on the actual sale you will end up losing a ton of cash.
The seller wants you to cover “all repairs” and there’s no “cap” on what you could end up owing.
This is why selling a business is so different from selling anything else.
In the real-life sale of your business you might very well need to indemnify the buyer from a certain risk…
But you should always try to put a cap on the amount of money you can owe.
Otherwise, you are putting your entire future at risk.
Here’s a real-world example:
Let’s say your buyer is worried about old machinery at your business. You and the buyer could agree on a time frame when you will cover the cost to repair any equipment.
The money would be held in an escrow account…
But your potential repair costs are capped at a defined amount.
That amount is never to be exceeded. “I will cover any repairs and maintenance to current machinery for a period of 12 months and up to but not exceeding $25000.”
The 25k goes into escrow the buyer can draw on it if a machine really does break down and if there’s money left after 12 months you are disbursed the remainder.
This way you remove some of the risk on the buyer’s end without hedging your future livelihood on unknowns.
As far as the car analogy in this article I’ve included it to illustrate an important point:
You can’t filter the sale of your business through any other lens.
Selling a business is unlike any other sale period. And these terms in any other context seem almost ridiculous.
But when it comes to your business understanding the “fine print” can either set you (and the buyer) up for a pleasant and profitable experience…
Or turn the whole situation into a nightmare ordeal.
All that being said, if you made it to the end of this article you are in good shape.
Now here’s my please use some commonsense disclaimer:
You should only rely on legal advice from a lawyer when selling your business.
I help business owners value their companies and market them for sale.
The topics discussed in this article are rooted in legal concepts but I am not a lawyer.
In fact, any lawyer reading this article may have had a heart attack from my oversimplification.
There are entire books written on indemnities, escrow holdbacks, and liability caps. Hire a transaction lawyer who has read them - it’ll save you trouble.
If you’re looking for legal advice on selling your business I would be glad to make an introduction to a transaction lawyer. Shoot me an email – sean@tws-advisory.com