Successfully Negotiating Secondary & Tertiary Elements of a M&A Transaction

Aug 9, 2022

Successful completion of negotiations requires an intermediary with significant knowledge, experience, and ability. They also often involve a willingness by the negotiator to be criticized and a need to justify positions & strategies.   One venue for negotiations commonly followed by the public are the negotiations between professional athletic teams and their players.  One of the best player agents of all time was Howard Slusher.  He represented many NBA & NFL stars including Paul Westphal, Gus Williams, Lynn Swann, & Dan Fouts.  He also became the lead negotiator for Nike and Phil Knight after Mr. Knight identified his significant talent and ability from the other side of the table.  Sadly, the world lost the Oregon resident recently with his passing in July at the age of 85.

Mr. Slusher’s ability as a negotiator in the athletic world would be judged favorably if only the financial size of the contracts delivered for his clients were assessed.  However, it was attention to detail in secondary and tertiary elements of the deal where he truly distanced himself from his peers.  As an example, when he was an instructor at USC one of his students, Jim Lawrence, asked him for assistance negotiating his contract after being drafted by the New Orleans Saints.  The end result was a strong first NFL contract, however the excellence of the job he had done was not truly known until Mr. Lawrence had a significant knee injury.  A situation covered by the contract with a clause outlining financial benefits to be paid in case of injury.  The contract was negotiated in 1969.  Today, clauses of this nature are standard, they were not at that time. The best professional intermediaries identify the opportunities and risks when reviewing the boilerplate in every contract.

IBA, as the oldest business brokerage firm in the Pacific Northwest, has successfully negotiated the sale of over 4200 privately held companies since 1975.  We have, as mergers & acquisitions intermediaries, created and achieved through negotiations many of the deal elements that are now considered standard fare and best practice in the industry.  IBA professionals through experience gained by actively negotiating transactions in different market conditions & industries and by working in collaboration with top attorneys, accountants, investors, and lenders gaining knowledge of relevant tax, environmental, employment, and trailing liability issues continue to evolve our recommendations and strategies for our clients in pursuit of the best possible outcomes for every conceivable situation.

As in a player contract, the top line goal for a negotiation involving the sale of a privately held company or family business on the seller side of the transaction, IBA’s expertise, is to achieve the top value possible in the marketplace.

However, as in most agreements the “devil” is in the details.  In addition to price, the following are some of the secondary & tertiary elements commonly negotiated by IBA business brokers for our clients:

  1. Financial Components of the Deal – How a seller gets paid can be more important than the amount paid for the company. If you sold your company for $10 million.  Would you prefer $10,000,000 cash at closing or $100,000 per year for 100 years paid annually?  Some common financial components in transactions include cash, seller promissory notes, escrow holdbacks, earn-outs, consulting agreements, and stock options.  If you do not know what each of these elements are and where market standards exist in 2022, it is prudent to engage someone who does as your professional intermediary for negotiations.Many banks require the seller to finance a portion of the deal to mitigate trailing liability risk and insure a smooth transfer of ownership takes place with the seller honoring transition training and non-compete obligations.  A business broker active in the marketplace will know what is achievable regarding loan term, interest rate, and collateral.  Insider Note:  If a buyer is obtaining bank financing, the seller’s promissory note should be at a higher interest rate than the bank’s because risk is higher due to the required subordinate position on the business and personal assets of the acquiring entity.
  1. Post Transaction Transition Training, Consulting, or Employment – Most business buyers prudently will want a selling owner to commit to a period of time transferring knowledge and executive management.  What is standard, should it be compensated or free, are there any restrictions related to financing that need to be taken into consideration?  A business broker can provide a reference resource and negotiate a deal element that is reasonable and fair to both parties.
  2. Non-Competition Agreements – A business buyer should be provided a “safe harbor” for future operation of the acquired company without threat of competition as a value element in a deal. How long should the agreement be?  What area is covered?  What activities are limited?  Who needs to sign non-competition agreements?  What are the penalties for violation?  Answers to these questions can vary by state and industry.  It is prudent to have strong legal & intermediary representation when negotiating non-competes.
  3. Tax Allocation – Business brokers at IBA commonly advise our clients that more important than the gross amount of a sale is the net amount they walk away with after taxes.  The tax code relevant to the sale of privately held companies, family businesses, and commercial real estate is sophisticated and constantly evolving at the state and federal level.  No one in a deal advocates for more dollars to be sent to Washington DC, Olympia, Salem, or Juneau.  It is wise to have strong transactional accounting representation when selling or buying a business.  In an asset sale transaction, it is critical that both parties file identical IRS Form 8594’s about the transaction or there is high probability that the deal will be audited by the federal government.
  4. Leases – It is common in metropolitan areas for businesses to be located in leased facilities. A real estate license is required in Washington, Oregon, & Alaska to negotiate new leases or lease assignments, unless performed by the tenant.  Most leases involving privately held companies are personally guaranteed by ownership.  It is beneficial to eliminate this liability when a business is sold.  This is an unbalanced negotiation because the seller is asking for something from their landlord and often not offering consideration in return.  The wrong intermediary facilitating this negotiation can result in multiple years of personal liability for the seller post sale.  The right broker can mitigate or eliminate this risk.
  5. Trailing Liability – Trailing liability for the seller exists in a spectrum of areas including product warranties, tax, environmental, and employment.  Mitigation of this risk in a deal is a collaborative effort by legal and brokerage professionals.

IBA has a deep Rolodex of collaborative referral partners.  We welcome the opportunity to provide vetted names of attorneys, accountants, bankers, and relevant consultants to buyers and sellers in the deals we are professionally facilitating.  It is our goal in all deals to facilitate transactions employing best practices where the parties make decisions from a foundation of knowledge.

Ultimately, a business broker or a sports agent should be judged by their client on the following three metrics:

  1. Were the desired financial terms achieved?
  2. Were all other elements satisfactory?
  3. Was risk mitigated sufficiently?

Phil Knight trusted Howard Slusher to achieve the best possible outcome for Nike in many negotiations.  Upon his death, Mr. Knight was quoted as saying, “Howard was first and foremost a negotiator.  He made it an art form and did it better than anyone”.

It is my hope when I head to the “Happy Hunting Grounds” in future years. That my legacy as a business broker with my clients will be similar.

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”.