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Negotiate the Purchase and Sale Agreement

Prepare to negotiate the Purchase and Sale Agreement.

NOTE AND DISCLAIMER: I am not an attorney. This is NOT legal advice. SellBiz is not a law firm. This information is intended to familiarize you with certain key provisions found in most small business purchase and sale agreements, and some best practices for negotiating the agreement. Please seek the advice and guidance of an attorney practiced in the art of business sales when you get to this step in the process.

Objective

Finalize and secure agreement from the buyer on all the important terms in advance of the closing.

Tasks

Brush up on the typical provisions in a Purchase and Sale Agreement. Determine your must-have or walk-away terms, and the points you are willing to compromise on. Retain legal counsel with a track record in business sales or mergers and acquisitions.

Best Practices

The Purchase and Sale Agreement is typically presented by the buyer about halfway through the due diligence period. In small business transactions less than $500,000 that does not involve real estate, it is not unusual for the agreement to be presented by the buyer or the buyer’s broker along with the offer. If the buyer is an individual and has no representation, you (or your counsel) may need to provide the draft agreement.

Keep in mind, most small business sales are done as ASSET sales. The buyer only wants your business’ assets, not your stock or corporate structure. Let’s first look at the important provisions included in most business sales agreements, so that you can familiarize yourself with what to expect:

  1. Total Purchase Price and Terms — including how much cash at closing and how much to be financed by the seller, or held back in escrow, and the terms of financing, earn out or escrow If you as the seller will be financing any portion of the sale, a promissory note is typically attached as a separate document.

Price and terms are usually make-or-break for both parties. There are many ways to express price and terms. As a rule, the more you are asked to finance or postpone receiving, the higher the price you should get.

Tip: Know your bottom-line, but don’t stress over the total price; stress over the terms. It’s not the price that drives a successful deal, it’s the terms. Terms determine price. That is where you will win or lose.

  1. Assets and Liabilities – including a detailed list and description of the assets being sold by the seller and any liabilities being assumed by the buyer.

Assets may include fixtures, furnishings, equipment, machinery, inventories, accounts receivable, business name, customer lists, goodwill, and other items.

Liabilities to be assumed by the buyer may include liens, accounts payables and assumption of the lease.

Tip: Don’t fail to list assets to be EXCLUDED from the sale, such as cash and cash accounts, real estate, patents, etc., and liabilities that the buyer will NOT assume.

  1. Closing Date – a definitive day, time, and place for Closing can also happen remotely and electronically, depending on the nature of the business. For businesses that have bricks and mortar operations, it’s customary to attend the closing in person, hand over the keys and do a final walk-through and hand off.

Tip: If the buyer tries to postpone the closing, you may be able to extract a concession or two. If the buyer tries to delay indefinitely or is any way wishy washy about when the closing will take place, reserve the right to go back to market and start engaging with other buyers. The No-Shop provision of the LOI or Term Sheet should have an expiration date.

  1. Adjustments and Prorations – including how the price will be adjusted on the day of closing to reflect prorated business expenses (like rents), inventory, and accounts As part of the offer, the buyer likely expects a certain amount of working capital be left in the business. The valuation of the business may need to be adjusted on the day of closing to reflect current, true, and accurate numbers.

Tip: If you are offering seller financing, earn out or hold back as part of the deal, these parameters can be used as lever points to satisfy the buyer to close before all numbers (like collecting receivables) are known.

  1. Seller’s and Buyer’s Representations and Warranties – verifying both parties have the right and authorization to make the You as seller will need to warrant that you have clear title to the assets being transferred and that you have disclosed all obligations and liabilities. Depending upon the nature and complexity of the business, there may be other reps and warranties required by both sides.

Tip: Have good counsel on this provision. Don’t allow the buyer to cajole you into making a representation or extending a warranty that you absolutely cannot guarantee.

  1. Seller’s Covenants – including the actions needed to be taken by the seller post-closing, such as transferring trademarks, licenses, permits, business name, lease, employee benefit plans, and other agreed-upon

This provision may also include a ‘Employee Termination Clause’ stating that upon closing the seller will terminate all employees except those with transferable contracts, and pay all wages, commissions, and benefits earned through the termination date. The buyer will then hire those terminated employees through the buyer’s incorporated entity, which will have a new federal employee identification number (FEIN).

Tip: If protecting the jobs of any of your employees is important, you should get some advice from counsel in advance to ensure the buyer will retain those employees.

  1. Post-Closing Rights and Obligations – including the buyer’s right to offset the purchase price by liabilities or inventory valuation differences that become known after the closing. It may also include obligations by the buyer if you are financing part of the sale, such as the obligation to carry insurance, maintain specified working capital levels, and allow you access to the financial records of the business until the purchase price is paid in

Tip: If you are getting all-cash, the buyer may require you to work in the business for a reasonable transition period, and to sign a separate non-compete agreement. If you agree to stay on, you can negotiate compensation for your time and expertise. If you plan to stay active in the industry, limit the non-compete to a specific time frame, such as two-years, and to a specific geographic range, such as a 30-mile radius of the business. Some sellers also negotiate additional compensation for agreeing not to compete for longer periods of time.

  1. Obligation for Fees – including the payment of broker or advisor fees, and legal expenses for the Typically, each party pays their own expenses, but you may be able to get the buyer to cover certain expenses if you gave concessions on price or terms.

Tip: If you hire a broker and attorney, expect their fees to be deducted at closing and distributed directly to them by the closing agent. You don’t want to pay taxes on the full sales price, then have to turn around and payout the fees from the proceeds. Get good advice on how to minimize your taxes from the proceeds of the sale of your business!

  1. Default Provisions and Governing Law – specifying what happens if there is a breach or There should be a cure period, meaning the defaulting party can fix the breach. If a breach is severe or remains uncured, how might the default be litigated? Where must the action be brought?

Tip: Make sure to expressly define what happens if the buyer fails to make timely payments or refuses to pay the earn out or escrow hold back. It’s a good idea to have an arbitration clause to avoid the time and expense of a court proceeding but defer to your counsel on what would be in your best interest if there was a default by you or the buyer.

  1. Ancillary Closing Documents – may include any number of things, including:
    1. Seller and Buyer Affidavits
    2. Bill of Sale
  • Promissory Notes
  1. Security Agreement
  2. Escrow Agreement
  3. Closing Statements
  • Transfer or Assignment Agreements
  • Consulting or Employment Contract
  1. Non-Compete Agreement
  2. UCC Filing Statement

Every deal is different and largely dependent on the nature, size and complexity of the business being sold. It’s impossible to anticipate all the components of a Purchase and Sale Agreement that may be required for your transaction. In fact, you may require a Stock Purchase Agreement instead, but that would be rare for the sale of a small business. Defer to your counsel on the appropriate form.

Note: See Step 14, Transaction and Closing Management, for a more detailed looked at ancillary documents that may be required to consummate your sale.

Tools and Tips:

Even though every small business sale is unique, the agreements which govern them are fairly standardized. Familiarize yourself with the common provisions. Pay close attention to the terms that can trip you up and bog down the deal. Focus on the important drivers, not the minutia. Don’t nitpick and don’t allow the buyer to nitpick — it takes the deal off track and can run up fees. When negotiating the deal with the buyer, pay attention to the disposition of the chickens, not the chicken feed.

The two things that get deals done are trust and likeability. Trust is being honest and transparent. Likeability is being reasonable, if not downright enjoyable, to work with. Buyers can handle weaknesses, soft spots, and bad news – every business has them. What they can’t handle are lying, surprises and subterfuge. Conversely, you shouldn’t tolerate an overly demanding or belligerent buyer, no matter how good the price and terms are. Always keep your options open.

Tips for Sealing the Deal:

  • You have your walk-away terms, and the buyer will have their walk-away Convey yours early and try to ferret out theirs. It’s rarely wise to say something is non-negotiable unless it ABSOLUTELY, POSITVELY is non- negotiable under any circumstances. If you can’t come to a meeting of the minds on the must-have issues on both sides, you are wasting your time.
  • Research the buyer and understand their motivations and pain It doesn’t hurt to empathize a little with their needs and viewpoint. What kind of deals have they done in the past? What were they like to deal with? What kind of reputation do they have?
  • Research the market conditions and competitive landscape for opportunities like yours. You are not likely the only deal in Be realistic. Know your value. Be prepared to negotiate every important provision with that knowledge.
  • Develop rapport and Set a positive, can-do tone. Find common ground with the buyer. Hold fast on your non-negotiables but be prepared to give a little on the issues that aren’t critical to you walking away with a good price and terms.
  • Distinguish the influencers from the decision makers. The influencers may include employees, relatives, attorneys, accountants, and brokers retained by the They make recommendations, but they don’t decide. Know who will make the final decision on price and terms.
  • Document and get sign off on every contingency when it has been satisfied, and on every contract term as Don’t allow the buyer to reopen and renegotiate contingencies that have been removed and terms that have already been agreed upon unless you are getting a concession of equal weight.
  • Be prepared to walk away. In my experience, most deals fall apart three times before they are finally It’s a strategy of some buyers to see how far they can push a seller; to see how tired or desperate they are. A seller who is prepared to lose the deal and walk away usually ends up winning in the end. A serious buyer will almost always come back to the table.
  • Negotiate from a position of strength. If your business is in a distressed situation, or the books are in disarray, the buyer will sniff that out early. You can’t bluff real numbers and tax If you failed to do Step 1, Seller Preparation, you won’t be negotiating from a position of strength. If you are prepared and have priced your business right (Step 2), you can get multiple bidders to the table and negotiate from a position of strength.
  • Listen carefully during meetings and calls with the Surface and allay their important concerns. Pick up on the nuances that drive them personally and motivate their interest in your business. There is a lot of ego and emotion wrapped tightly around every business sale, on both sides. You’ll need to master your ego and emotions and be sensitive to theirs. Being prepared and having the facts and information, puts you in control if the buyer becomes demanding or unreasonable.

Summary

The important levers in every successful sale of a business are in the terms, not in the price. The terms determine the final price and how much money you will walk away with when it is all said and done. All-cash deals are rare and typically come with a discount, meaning you walk away with less. Most deals are either seller financed or come with an earn out or hold back. Using those levers wisely can help you walk away with more money.

The first step to using leverage in a negotiation is knowing when you have it and knowing when you don’t. If you have it, hold firm, while being respectful and open to compromise on the lesser points. If you don’t have it, a little charm can go a long way to getting a deal you can live with.

Examples

  • Sample Simplified Contract for the Purchase and Sale of a Micro Business
  • Sample Offer and Purchase Agreement