Exit Strategy Negotiations in the Sale of a Business

Sep 20, 2016

The sale or purchase of a privately held company or family business is one of the most sophisticated transactions an individual can participate in as a buyer or seller. The transaction’s sophistication is derived from two elements. The first element is the legal, accounting, tax, and business issues associated with the sale or purchase of a privately held company. The second element involves the interpersonal dynamics necessary for the seller and buyer of a business to work together cohesively to insure a minimum amount of operational turbulence for the company’s customers, employees, and suppliers following a transfer of ownership. A business owner can attempt to execute a business sale exit strategy with support of their attorney and accountant; however, those individuals often lack the negotiation & deal facilitation skills and market knowledge necessary to achieve the best outcomes possible related to the business terms associated with a transaction. A knowledgeable, experienced business broker has the ability to bring these requisite skills to a transaction for their client with the added advantage over legal & accounting advisers that intermediary fees are traditionally paid on performance at completion of the transaction rather than accrued through the process.

The following are five transaction terms commonly negotiated by knowledgeable, experienced business brokers at IBA with cognizance of market conditions on behalf of our clients:

1. Sale Price of Business – The valuation of a privately held company is subjective science requiring financial & accounting knowledge, cognizance of market conditions, and knowledge of prior sales involving similar companies in the same industry and/or region. A value needs to be able to be justified to a business buyer, their accountant, and potentially a bank or investor. Failure to justify the value to any of the parties can result in a failed transaction. IBA is recognized as a regional expert on business valuation. The companies we represent traditionally sell within 10% of the asking price and a very small percentage of our transactions fail in due diligence or because financing cannot be secured.

2. Terms of Sale – Business sales come in a spectrum of terms. Financial components of a business sale can include cash (every seller’s favorite component), a promissory note, and/or a variable performance based component. The amount of cash received by the seller of a business can be the result of a successful negotiation or through knowledge of the lending environment. Negotiated terms in a promissory note include value, interest rate, term, collateral, and a spectrum of smaller terms ranging from the default interest rate to late penalties. Variable performance based payments (commonly called earn-outs or royalties) have negotiated calculations and terms. Negotiation of financial terms in the sale of a privately held company or family business is a sophisticated, nuanced process best entrusted to an experienced, knowledgeable business broker with a superior skill set. IBA regularly receives referred clients from attorneys & CPA’s and past clients who recognize our negotiation & deal facilitation skills have helped entrepreneurs achieve the best possible outcomes in the sales of their businesses for over 40 years in the Pacific Northwest.

3. Employment Contracts & Consulting Agreements – The successful transition of ownership of a privately held company or family owned business often includes executive management staying with the company for a period of time as an employee or consultant. The compensation & term in these agreements are negotiated elements in the transactions. IBA business brokers have the knowledge, experience, and skill to negotiate the business terms of employment & consulting agreements for their clients that facilitate a smooth transition of ownership and knowledge transfer without creating an environment where the selling party is working for the buying party and would have been better off continuing to own and manage the business.

4. Non-Competition Agreement – The purchase of a business traditionally includes a non-competition agreement as an asset. The inclusion of this asset in a business sale enhances the value received by the seller for the business. The time period & area of a non-competition agreement are negotiated terms. They should be reflective of the area served by the business and threat of future competition perceived from the seller. Knowledge & experience are necessary to negotiate non-competition agreement terms in collaboration with legal counsel to insure no ambiguity exists for the parties. IBA business brokers have successfully negotiated thousands of non-competition agreements in collaboration with many of the top business attorneys in the Pacific Northwest that defined boundaries that were honored by the parties post transaction. We are happy to share the knowledge we gained in these negotiations with our clients. There is no substitution for knowledge & experience in the sale of a business.

5. Tax Allocation – The net value received from a transaction is a more important value to a party selling a business than the gross amount achieved. IBA business brokers have had the honor of working collaboratively with many of the top CPA’s & accountants in the region to negotiate the best possible post tax outcome for our clients in transactions. The best tax strategies when selling a business vary from entity to entity (e.g., C Corporation, S Corporation, LLC, Partnership, Sole Proprietorship, etc.) and from individual to individual depending on their personal situation and marital status. We are happy to share the knowledge we gained in these negotiations. There is no substitution for knowledge & experience in the sale of a business.

An exit strategy associated with the sale of a business is generally achieved or lost once a willing & able buyer has been found to match with a willing & able seller. Skilled, knowledgeable, experienced business brokers have an established history for successfully completing transactions. I recommend any business owner considering hiring a business broker evaluate the individual’s experience, knowledge, and negotiation & deal facilitation skill prior to signing a representation agreement. IBA has completed over 4000 transactions involving the sale of privately held companies and family owned businesses in the Pacific Northwest since 1975. 100% of our fees are based on performance.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.