As a savvy entrepreneur, you already know that every business negotiation requires courage and determination. The negotiation process can seem daunting for those out of practice. (After all, when’s the last time you bought a business?) But I must tell you, once you become familiar with this very old game, you will be surprised how intuitively and naturally you play it. Closing a deal is as much a function of addressing a seller’s emotional and psychological needs as it is ironing out the financial terms. What makes this situation so fragile?
Probably what you might call seller’s remorse. The seller is so “married” to the company-having perhaps started it from the ground up-that the thought of separation from it becomes unbearable. Seller’s remorse tends to become more pronounced as negotiations continue. It can emerge at any time during the negotiation period and can become a serious potential deal-killer that should be anticipated. When you present yourself to the seller, your primary goal is to leave with the title to their business. It is understandable to hurry through this process; however, this tendency can scare off the seller, whose time and energy initially built the business. His emotional attachment to the business (possibly being family-owned) would make it difficult to let it go. It can be quite discouraging to the seller that you are trying to purchase his business without using a penny of your own. In this perspective, you must be able to sympathize with him and show him that you value his determination to have created a great business. This strategy will allow you to close this deal in a tactful manner.
Question: How can I structure the closing procedure to the business?
Answer: Before signing any final agreement, you need to decide upon the method of transfer, as it requires important legal, financial, and tax issues. Depending on how the seller used to operate the business, either as a sole proprietorship or partnership, the sale must be handled as a sale of assets. Under this transfer, the buyer hands the title of the assets to the seller. You will then set-up a new corporation to accept all titles of the new assets, entering a new lease under the newly formed corporation.
Question: How can I protect myself while buying the seller’s assets?
Answer: Buying his assets is the most common type of transaction for smaller businesses. However, you will need to protect yourself from any liabilities that you may encounter in the future. For your maximum protection, the agreement between both of you should includes the following points:
Who will be included in the agreement:
o Anyone and everyone who will use the business in any future transaction should be included in the agreement. Shareholders, owners should have their names and titles included as well.
What assets are to be sold:
o The agreement should accurately specify what assets are to be sold so there will be no misunderstanding while transaction are to be done. The seller should specify what assets have already been sold to other suppliers and what are left remained.
Some examples are as follows:
o Accounts receivables
o Notes receivables
o Interests in other businesses
o Tax rebates
o Insurance claims
o Furniture and fixtures
o Motor vehicles
o Real estate
o Good will (customer base)
o Trade secrets
o Franchise and distributorship rights
o Licenses and permits
Most sellers will retain all liquid assets such as cash, receivables, prepaid expenses and securities, such as bonds and CD’s (Certificate deposits). The sale of the business will mostly include inventory, furniture, equipment, and good will as the essential operating assets.
Question: How can I help close this deal in my favor?
Answer: By nurturing a good relationship with the seller based on mutual trust and confidence, you will already have gained an advantage during the negotiations. While the financial aspects of the deal are critical, establishing an understanding with the seller can prevent the deal from crashing.
Question: Are there any other reasons why the seller might decide to withdraw from closing a deal?
Answer: As said previously, besides seller’s remorse, there is also the danger of seller’s envy, a more common situation you may encounter in a no-cash deal scenario. The following illustrates how sellers envy can play a role in ruining a no-cash deal: you’ve learned all the leverage possibilities and used them to whittle away at the down payment until you’ve reached your goal of no money down, with 100% being financed- perhaps by the seller himself. You’re feeling pretty good about your accomplishment, when out of the blue the seller’s body language-and his rapid eye blinking-tells you something’s wrong. At this point, he might reconsider the whole deal and walk away from it. The fact is that he might want to protect his own reputation. Knowing he sold you the business for almost no money, he feels cheated, especially if he bought the same business from someone else for a substantially higher price.
Question: After the agreement is signed, is there any escape route for me in case I want to withdraw for the purchase of the business?
Answer: After you sign the agreement, the business is yours. However, you can ask your attorney to include in the pre-signed agreement, some escape clause. You should add a clause that the agreement is conditional on several factors such as satisfactory leases, approval of the seller’s book by your accountant, certain assets to be included etc…
Make sure you buy the business through a limited liability corporation that you’ve created for these specific purposes. It is your choice to determine the business legal entity that suits you best. With the corporation, you will be protected from personal liability should you decide to default. Always make sure you cover all corners while negotiating. It can be a very exciting time for you to acquire a new business, but you need to follow the rules diligently and carefully. It will save you time, money, and headaches.