Let’s Make a Deal: Bridging the Price Gap between Buyer and Seller

01 Mar Let’s Make a Deal: Bridging the Price Gap between Buyer and Seller

You built your business from scratch. Every sale was a sacrifice, time away from your family. It was an investment in your future. Every time the business grew, it represented something you could do for your family: a larger home, a university education, a much-anticipated vacation.

Now that you’re ready to sell your business, you want to get the most you can out of it. Most sellers want a simple cash deal for the highest price. This can be complicated when a seller lets emotions get in the way and overvalues the business.

Buyers, on the other hand, don’t want to pay top dollar. They want a deal. They may be better able to understand what your business is worth, but they won’t really understand what your business will look like without your involvement – or how much money they can expect to earn after your departure.

That perfect deal may be elusive. Yet there are a variety of ways to manage the challenge and reach a compromise.

Share the Risk

Buyer and seller each face risk during a transaction. The buyer takes on most of the risk of the business and may even be worried about the success of the business in the seller’s absence. The seller, in turn, may be concerned about the reputation of the business or about the clients, vendors and other partners. The seller may be able to get a higher sale price if he or she remains actively engaged. This may be a good option if you’re not yet ready to move on but you want to secure a buyer for your business.

• Price adjustment mechanisms.
• Earnout or seller risk participation.
• Price deferral through escrow funds, vendor take back loan, security, etc.

Share the Burden

A business can be a burden. The buyer wants to ensure that the business will continue to be successful once the seller is no longer part of the picture. The seller wants to continue to participate after the initial sale in order to ensure a smooth transition and convince clients, vendors and other partners to stick around. In this type of transaction, the seller may agree to a lower purchase price (saving the buyer money initially) but also commit to consulting with the buyer for a certain period of time.

• Seller contributes to certain buyer expenses.
• Buyer contributes to certain seller expenses.
• Part of the purchase price comes from consulting fees or non-competition payments.

Providing Financial Support

The right buyer may have the knowledge, the background and the drive – but not the cash. Maybe the buyer can pay a higher price for the business if he pays over time. Maybe the seller can earn a passive income by leasing assets from the business to the buyer. Providing financial support may mean making the business more attractive to the buyer or meeting a seller’s strategic need. Either way, the seller and the buyer benefit from the arrangement, and the business continues on a successful path.

• Defer payments.
• Hold a vendor take back loan with no or low interest rates.
• Lease key assets to the buyer.
• Seller keeps certain assets, with the possibility to liquidate them for his or her own benefit.

Finding the right buyer can be complicated. If you think you have the right buyer but that buyer doesn’t have enough cash in the bank, the deal doesn’t have to evaporate overnight. It may be worthwhile considering other options to bridge the gap and move the sale along.

To learn more about transitioning your business, contact us.

Joel Rose

With over 35 years of experience, Joel Rose helps families – and their businesses – to prepare for the future. He offers guidance and support to help his clients create estate plans and succession plans that meet the needs of the whole family. Through his extensive professional and personal experience, Joel is known for his compassion and his ability to find a creative solution to meet each family’s needs.