Navigating Negotiations

In a well-structured business sale, there are often two phases to the negotiations: (1) Non-Binding LOI and (2) Binding Purchase Agreement phase. Some advisors may argue that all negotiations should take place in a single phase. However, this is only realistic if you have a very straight forward deal or a situation where you are only attempting to entertain an offer from a single potential buyer. Some deals will require several stages to cover a multitude of complexities or for reasons related to new developments that emerge throughout the process.

Phase One: ?The first phase is to outline the key deal points in a non-binding letter of intent (LOI) aka Term Sheet. The LOI will provide the framework for the eventual binding purchase agreement but without including every detail. There are a lot of deal points to cover in a business sale. Jumping right into all the minutiae can interrupt the honeymoon phase between a buyer and seller sooner than necessary. It is like negotiating a prenup agreement on a second date. It is too much too soon. Start with the basics in the LOI to keep building the relationship so it is strong enough to withstand potential bumps down the road.

An LOI should identify Who, What and When:

??Who are the parties? If the buyer and / or seller are not sole proprietors, the entities should be identified as well as their designated officers or managing members who will be signing the contract.

??What are the offer price and primary terms? The LOI should be specific about what is included and not included in the sale.

??When will certain things take place, including the due diligence time frame, length of contingencies, target closing date, etc.?

If an LOI is too short and sweet, it may be leaving out very key deal terms. The parties may feel that they are on the same page but learn that there are major discrepancies far down the road. On the other hand, an LOI that is too detailed can cause a long delay in being able to reach an executable version. If there is a lot of friction early in the process, the buyer is more apt to walk away.

I find that buyers and sellers can get really hung up on the language in an LOI, rather than the deal points themselves. It is best to table certain language for the binding purchase agreement if you reach an impasse on any insignificant terms. You and the buyer may be perfectly in agreement on the spirit of a clause but struggle to find common ground on how to spell it out. This occurs quite often but it is better to work through some of these items in phase two so you can allow your relationship with the buyer to continue to progress.

Although an LOI is non-binding in that it does not obligate a buyer to complete the purchase, there may be certain items that are binding upon the seller. The primary example is exclusivity. If an LOI contains a no shop clause, you will be disallowed from soliciting offers from other potential buyers for a period. Like everything else, this can be negotiable.

From a buyer’s perspective, they do not want to invest a lot of time and money in moving towards purchasing your business if they feel there is a threat that you will sell it to somebody else. From a seller’s perspective, you do not want to tie up your business off the market for a significant period, not knowing whether your buyer will complete the purchase or not.

If you have the luxury of multiple competing offers, you will be in a better position to dictate certain parameters, including exclusivity. You may be able to use exclusivity as a bargaining chip. For example, you grant the buyer exclusivity in exchange for a slightly higher price, less seller financing, or a quicker closing, etc.

Exclusivity should always have a reasonable expiration, typically ranging from 14 days for a very straight forward deal and up to 90 days for a much more complicated transaction. If your buyer is adamant about having a longer exclusivity period than you are comfortable with, you could propose there be different stages to the exclusivity period. For example, the buyer may be granted exclusivity for 30 days and if they hit a certain milestone within that timeframe, the exclusivity will be extended for another 30 days.

Your buyer will likely request that you cease all solicitation efforts during the no shop period. However, you may request the right to continue soliciting backup interest but will agree not to enter any negotiations with another suitor. It is important for the buyer to understand that you are also risking time and money by taking the business off the market for a significant amount of time.?

Phase Two:?The second stage of the negotiations will come during the drafting process of the binding purchase agreement. If the LOI was drafted properly, you should not be negotiating major deal terms at this point but working out the specific language of items such as the non-compete agreement, training and transition protocol, representations and warranties, dispute resolution, prorations, work in progress adjustments, etc.

Prepare to have flexibility without giving up much in the way of monetary value. Prioritize which items are most important to you and decide what bargaining chips will be easiest to part with. A small concession on your end might hold a lot more value for the buyer.?Like any relationship, most deals fail when one or both parties are too stubborn to see the others side's perspective.

Throughout the negotiation process, remain thoughtful with how you respond to the buyer's positions. Avoid in person negotiations unless you truly reach an impasse. Selling a business can be an emotional process. If you are not apt to remaining even keeled, take your time in responding. The number of deal points to negotiate can be quite overwhelming, and at times, you will likely think the buyer is being ridiculous with their positions. Maintain your focus on the big picture and don't allow simple things to derail the transaction.

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