Getting the best business acquisition offer for all variables

When evaluating offers for selling your business, it’s crucial to look beyond the headline figures like purchase price and EBITDA multiples. The true value of an offer is often hidden in the details, the nuances that can either enhance or detract from the overall attractiveness of the deal. Here, I will walk you through five key nuances you need to consider to ensure you get the best possible acquisition offer.

Structural Implications

Working Capital Adjustment

The first nuance to consider is the working capital adjustment. When a buyer acquires your company, they expect it to have sufficient cash to continue operations seamlessly. This means there needs to be enough working capital left in the business to avoid additional capital injections post-transaction.

Imagine you’ve been running your business for years, and over time, a significant amount of cash has accumulated in the company’s accounts. The buyer doesn’t want to purchase the business only to find out they need to inject more money to keep it running. Therefore, during negotiations, it’s crucial to define the appropriate level of working capital that must remain in the business. This ensures operational continuity without leaving excess cash that could be better utilized elsewhere.

We’ve seen different scenarios where buyers either demand that all cash stays in the business or sellers want to take out all the cash. The reality usually falls somewhere in between, with both parties negotiating a reasonable amount of working capital to remain. This adjustment directly impacts the purchase price, so it’s essential to advocate for your interests to minimize unnecessary capital retention while ensuring business stability.

Seller Notes

Another important element to consider is the seller note. This is a form of financing where the seller essentially lends part of the purchase price to the buyer. For example, if your business is sold for a dollar and the buyer pays 80 cents at closing, they might ask you to hold a note for the remaining 20 cents. This seller note is structured like a loan, to be paid off over a set period with interest.

Seller notes can make the deal more financeable for buyers, allowing them to pay a higher price upfront. It also keeps you, the seller, aligned with the future success of the business post-transaction. This alignment ensures that both parties remain committed to the ongoing prosperity of the company.

However, it’s essential to balance the proportion of the seller note in the deal. While holding a note can facilitate the transaction, you don’t want it to comprise too large a portion of the total purchase price, turning the deal into a risky proposition. Typically, seller notes range between 10% to 20% of the deal value, ensuring both feasibility and alignment without undue risk.

Earnouts

Earnouts are another critical aspect to understand. Unlike seller notes, which are guaranteed payments as long as the business remains solvent, earnouts are contingent on the business achieving specific performance targets post-transaction. For instance, a portion of the purchase price might be paid upfront, with additional payments made over time based on revenue milestones or client retention rates.

While earnouts can align interests and ensure continued performance, they also introduce uncertainty. The conditions tied to earnouts must be clearly defined and achievable. They should reflect realistic targets that you are confident the business can meet. It’s also advisable to negotiate terms that minimize the risk of non-payment due to factors beyond your control.

Other Considerations

Employment Contracts and Non-Competes

Post-transaction, buyers often require the seller to stay involved in the business for a transition period. This involvement can take the form of employment contracts or consulting agreements. Additionally, noncompete clauses may be imposed, restricting the seller from starting or joining a competing business within a certain geography and timeframe.

These terms need careful negotiation. Employment contracts should specify clear roles and responsibilities, ideally tapering off over time to reflect a decreasing level of involvement. Noncompete agreements must be reasonable, both in scope and duration, to avoid unnecessarily restricting your future professional opportunities.

Summary of Key Points

To summarize, the attractiveness of an acquisition offer goes beyond the headline figures. Five key nuances significantly impact the overall deal:

1. Working Capital Adjustment: Ensures sufficient cash remains in the business for smooth operations post-transaction.
2. Seller Notes: Part of the purchase price financed by the seller, aligning interests and facilitating the deal.
3. Earnouts: Contingent future payments based on performance, aligning incentives but adding complexity.
4. Employment Contracts and Non-Competes: Post-transaction involvement and restrictions to ensure smooth transition and protect the buyer’s interests.

Understanding these nuances and negotiating them effectively is crucial to maximizing the value of your business acquisition deal. Each element plays a significant role in shaping the overall structure and terms of the offer, ensuring that both parties are aligned and that the transaction proceeds smoothly.

By focusing on these details, you can turn a good deal into an excellent one, securing the best possible outcome for your business sale. Stay informed, advocate for your interests, and work with experienced advisors to navigate these complexities successfully.