Negotiate the highest and best offer for your business.
Objective
Get multiple bidders to the table, compare, and contrast their respective offers, and counter in a manner that positions you for a successful closing.
Tasks
Understand the nuances between Term Sheets, Indications of Interest, Letters of Intent, and Business Offer and Acceptance Agreements. Be prepared to breakdown the pros and cons of an offer. Know how to successfully counter an offer.
Don’t allow prospective buyers to push forward with due diligence until they have presented you with a written offer and you have accepted it. Make sure you understand all the terms, the contingencies, and the buyer’s time frame for closing. Try to get a deposit when you accept an offer!
Best Practices
Valid offers to buy your business may come in different forms, depending on the size and complexity of your business. Offers are often extended by the buyer’s broker or intermediary, who will send a standard form they are accustomed to using. If the buyer is an individual with no professional representation, you may need to provide him or her with the form you prefer.
In any case, it is always advisable to have good business, tax, and legal counsel when entertaining offers.
An initial offer may be extended verbally to test your flexibility on price and terms. No use wasting your time or theirs if the offer is way off. If the verbal offer is unacceptable under any terms, say so. If the verbal offer is in the ballpark, you should indicate your willingness to entertain it if the buyer submits it in writing. Until you get a formal written offer, it’s just talk….and some buyers will talk you to death.
Try to get a written offer as soon as possible, after the buyer has had a chance to review your Selling Memorandum (Step 4) and conduct an Initial Inspection (Step 10). It’s a good practice to push them to submit a non-binding offer. If you did a good job on your Selling Memorandum, you should have provided some guidance to buyers on how to submit an offer. Some of the offer forms you might receive, include:
Indication of Interest (IOI) – also called an Expression of Interest (EOI), is used to layout the broad strokes of a deal. It will typically include a price range, not a specific price, to be finalized after completion of buyer’s due diligence. IOI’s are more commonly used for businesses selling for more than $2M but can be an effective tool for smaller businesses to ascertain the seriousness of buyers who have signed the NDA, read the memorandum, and inspected the business. IOI’s are good to quickly separate the tire kickers from the serious buyers, especially when you have multiple buyers interested at the same time. An IOI is always non-binding.
Letter of Intent (LOI) or Memorandum of Understanding (MOU) — is used to more formally pinpoint price and terms. The LOI or MOU will usually state that the price may be modified after due diligence if the revenue and earnings are not as purported in the Selling Memorandum. An LOI can be binding or non-binding. An MOU is almost always binding. It is not uncommon to get an LOI or MOU after receiving an IOI and after a few more discussions between the parties, but motivated buyers will typically forgo submitting an IOI and jump right to an LOI or MOU.
Term Sheet – is a formal written offer expressing the buyer’s intent to purchase a business. It stipulates the price, down payment, deposit (if any), expected seller financing (if any), additional consideration (such as earn out), time frame for due diligence and closing – all subject to a definitive Purchase Agreement. A term sheet is usually non- binding, but the seller can negotiate the forfeit of the deposit if the buyer backs out. How deposits are handled are usually controlled by a separate Escrow Agreement.
Business Sale Offer and Acceptance Agreement – is a formal offer and purchase contract all-in-one. It is the preferred form used by business brokers for small business sales under $500,000, where there is no real estate involved. It is an “asset purchase agreement,” meaning the buyer is only buying the assets of the business, not the entity itself or the stock of the company. We will cover this in detail in Step 13, Purchase and Sale Agreement.
THE OFFER
A written offer can take different forms, as outlined above, and cover a wide range of issues. Most are non-binding. Different terms have different trade-offs and risks. It’s best to consult a good attorney and business advisor to help you weigh the tradeoffs.
Let’s discuss some of the typical provisions and how you might counter them.
Definition of Assets – the offer should include language about what exactly the buyer is purchasing. This provision is usually stated as, “substantially all of the assets of the business.” Any liabilities are typically the responsibility of the seller and paid off at closing – but not always.
If you are making concessions on price, payments, or other terms, you can counter an offer to include the buyer assume certain liabilities of the business. Be clear in your counter about what assets you are and are not selling and what liabilities the buyer will assume and what liabilities will remain your responsibility.
Price – the price offered can be fixed or a range. An all-cash offer typically will be on the low-end of the valuation range for your business (see Step 2, Business Valuation). Most buyers will expect a 20% discount for paying cash. The more the buyer expects you to finance, or to take an earn out, the higher the range you should expect. In other words, cash is king, so the buyer will expect a good deal if paying cash.
The price will likely include the amount of cash you need to leave in the business, if any, for working capital when the buyer assumes control. Be on the lookout for this term. You don’t want to have to argue over this later. Most sellers leave 30-90 days of operating capital. The amount can be used as leverage when countering the offer.
If you as seller are being asked to finance part of the purchase or defer payments, then you should counter with a higher price!
Payment Terms – cash is king but rarely rules in the sale of small businesses. Expect the buyer to ask for seller financing of between 10% and 30%, or a hold back, earn out, or other terms specifying deferred payments. It’s common sense that the more you defer, the more likely you are to get a good price, but you will need to have some reasonable assurance that you will collect.
You should counter an offer made with payment terms with general recourse language about what happens if those payments are not made. Save the specifics for the full agreement.
Escrows and Hold Backs – the offer will likely stipulate that a certain percentage of the price paid by the seller at closing will be “held back” and placed in escrow for a set period. This period can vary, but it’s usually about ninety (90) days. It can be as long as a year. The buyer wants to be sure that all the assets transfer. He or she may need to confirm that the receivables are collectable, or that an agreed upon amount of working capital is left in the business. There are all kinds of reasons for hold backs. Expect to see this provision in the offer. If it’s not, you should confirm that no hold backs are expected. You don’t want to wait for 60-90 days of due diligence to get a purchase agreement that says you will only get 20% at closing and the rest will be financed or held back.
You should counter an offer made with holdbacks with the precise amount as a percentage, time frame, and general terms under which any hold backs will be released to you. A typical hold back is 10% of the total price or 30% of the receivables. Save the specifics for the full agreement.
Contingencies – the offer will likely include a list of contingencies that must be removed before the sale is consummated. There could be a wide range of contingencies depending on the nature of the business – too many to anticipate here. For example, an offer might be contingent upon the buyer securing an SBA loan.
You should counter with the elimination of contingencies you believe are not relevant but are merely busy work. You should include language about how and when contingencies are removed and that no additional contingencies can be added after your acceptance of the offer. Don’t allow the buyer to make contingencies open-ended.
Due Diligence – the offer will likely include an open-ended due diligence period and a list of documents and findings the buyer expects to verify to consummate the deal.
You should counter with a specific list of things you agree to provide and attach it as an exhibit to the offer. This could be files, interviews with customers and employees, and other relevant documentation any buyer would reasonably expect to see.
Due diligence should never be open-ended. The buyer could request a never-ending stream of files and even present a new list two days before closing, that you obviously would find it difficult to deliver. Agree on the documents and other confirmation you must supply in advance. The buyer will likely counter that the disclosure by you of certain information may lead them to request additional documents and that it is impossible for them to know what they might be in advance. If that happens, agree to provide information as “reasonably requested” by the buyer, but that no NEW documents or information will be requested at least two-weeks prior to the scheduled closing date.
No Shop and Deposit or Break-up Fee – a no shop provision essentially states you will take the business off the market for the due diligence period and not advertise the business for sale or entertain offers from any other party. The buyer wants to ensure you will be negotiating in good faith exclusively with them. Most buyers will typically ask for ninety (90) days. Some will put in no deadline, meaning the no shop is indefinite. Most will not offer a deposit, or will offer a small, fully refundable deposit or break-up fee.
You should counter with a specific deadline for due diligence and consummating the purchase agreement – usually 60 days. If it all possible, you should get a deposit for taking your business off the market. The deposit should be meaningful – usually 10% – 20%. In lieu of a deposit, you can counter with a break-up fee that must be paid by the buyer if they walk away from the deal.
If the buyer balks and refuses to make a good faith deposit, you should shorten the due diligence period to thirty (30) days and insist a deposit be made at that time to extend due diligence another 30 to 60 days. If a buyer can’t do enough due diligence in 30 days to satisfy themselves that your books and business are as you purported them to be, they are either not serious or intend to string you out and break you down.
I cannot stress this point enough. Time is always on the buyer’s side. They are easily distracted by other shiny objects, i.e., other opportunities they learn about after making you an offer. They will string out the purchase as long as possible, then walk away at the drop of the hat. You will have lost months of time and probably the interest of other buyers. Keep them on a short leash from the get-go!
Transition and Non-Compete – expect to see a transition period in the offer as well as a statement confirming you will not compete with the business post-acquisition. The offer may require you to train the new owners and/or continue working in the business for a set period. Most buyers will expect the transition period to be part of the price and for the non-compete to be for three years and a certain geographic range.
Depending on your personal plans and the nature of the transition work that will be required, you can counter for your time and expertise for the transition period to be compensated over and above the purchase price. If you are planning to relocate immediately upon the sale of your business, you might be able to negotiate working remotely during the transition period.
Confidentiality – the offer will typically stipulate that the price and terms are to remain confidential and that you as seller will hold all information you learn about the buyer confidential.
If not explicit in the language, you should counter to reserve the right to let interested buyers know you are in a no- shop period but will contact them if the deal does not close. The price and terms can be confidential, but the no shop itself should not be confidential. Being off-the-market does not mean you have to take your listing off the BLS. You just can’t engage with new buyers who contact you. Always reserve the right to keep other buyers warm. Deals often fall apart.
Expenses – the offer will typically state that each party will be responsible for their own expenses of due diligence and closing.
If you are giving concessions on price or payment terms, you might want to counter that the buyer pays your legal costs of closing, not to exceed a certain amount.
Tools and Tips
Don’t negotiate with someone who can’t make a final decision. Don’t show your hand to the dealer, show it to the buyer. Know your walk-away price and minimum acceptable terms. Don’t waste time on an offer that doesn’t meet your minimum expectations unless the buyer shows a quick willingness to adjust the offer.
Be careful of the traps set by a broad offer with ambiguous terms. It’s tempting to push specifics to the full agreement – all to be determined later. This will rarely work in your favor. There is a fine line between negotiating an offer and the definitive terms that will be required in the full agreement. Don’t accept a Letter of Intent assuming you will be able to negotiate something different later.
Focus on the most important terms that ensure you will likely get the full price you bargained for. Don’t leave important terms to be negotiated as part of the purchase agreement. You could lose 60-90 days only to discover the parties are too far apart. Spend the time to carefully entertain, counter and negotiate an offer before accepting it. Remember, there are plenty of other fish in the waters. Know your value and negotiate from a position of strength by having multiple bidders at the table.
Most importantly, don’t be a jerk! Maintain an even temperament. Keep it professional. Take the measure of the buyer. Negotiating an offer is not arm wrestling, it’s chess.
Summary
Offers can take different forms. The most common are IOI, LOI, Term Sheet and Offer and Acceptance Agreement. There is no such thing as a “take it or leave it” offer, no matter how firm a buyer or broker declares the offer to be. You should weigh the trade-offs and be prepared to counter the offer in a way that promotes good will and enthusiasm among both parties to move forward with due diligence and closing. You will be in the driver’s seat if you are successful in getting multiple bidders to the table.
Examples
- Sample Indication of Interest (IOI)
- Sample Letter of Intent (LOI)
- Sample Term Sheet
- Sample Offer Form
- Sample Counteroffer Form
- Sample Escrow Agreement