In the third chapter of How to Buy a Digital Business, we discuss how to structure a deal and present an offer. A critical step in the acquisition process, getting to an agreement on a simple contract through careful negotiation will set you up well for a successful closing. If you want a more professional looking and complete e-book with images and graphs, you can download the PDF.
3. How to Structure a Deal
The next step in the search process is to make an offer on a business. Remember, your goal is not to convince the seller of your viewpoint, but as a buyer, to identify a proposal that works for both parties. As such, there are a number of considerations beyond your analysis and value assessment to consider. Moreover, relationship-building and trust through your discussions are critical components. A few things to consider:
- Manage the seller's expectations
- Listen and understand the seller's point of view
- Allow a third party to wear the "black hat"
- Start with a simple, one-page term sheet
Manage the Seller’s Expectations
As you build rapport with a seller through discussions, it’s common to want to avoid discussion of what you think the company is worth. This can lead to a lot of wasted time. It’s best to manage the seller’s expectations right from the start, particularly if there is a significant discrepancy between an asking price and what you are willing to pay. Be upfront with how you plan to finance the deal, especially if you expect the seller to finance a portion of the deal.
As the deal progresses, make sure to specifically address anything “new” or not aligned with prior discussions, even if it’s something that seems trivial. It’s easy to lose trust or create animosity when there are surprises, so work to proactively head them off. In-person meetings or video conferences are generally better alternatives to phone, text, or email when addressing sensitive topics, and it’s often better to work through issues directly with the seller rather than through a team member.
Listen and Understand the Seller’s Point of View
There are often personal factors influencing a business owner’s decision to sell, and specific deal points that are important to them. You will have a better chance of reaching an agreement if you understand the owner’s drivers and then tailor your offer and structure to address them.
Some sellers, for example, hope the sale of their business will allow them to retire. How much cash will they need to receive after taxes from a sale to make this possible? Can you structure your offer to help get them there? Or maybe the seller has a family member involved with the business whose livelihood will be impacted with a sale. Is there a way you can keep this person involved post transaction?
Allow a Third Party to Wear the “Black Hat”
Whether a CPA, an appraiser, a buy-side advisor, or other knowledgeable professional, it can be helpful to involve a third party when discussing sensitive topics like valuation. Involving a third party will help you to maintain a strong, cordial relationship with the seller while at the same time making a case for a more favorable deal.
Presentation of your position is key. Any written assessment of the business or its value should be clear, concise and easily understandable to the owner. The individual you work with should have a relevant background, present themselves professionally, and be able to articulate your position in a respectful way.
TIP: Listen to the seller and identify a proposal that works for both of you.
The Offer: Start with a Simple, One-Page Term Sheet
When conveying your offer, it is advisable to initially do so in the simplest way possible. Distill your offer to its key points and place them in bullet format into a one-page term sheet. Points conveyed should be the purchase price, payment terms, any personal guarantees, specifics on the assets or stock being purchased (and not being purchased), handling of accounts receivable, accounts payable and inventory at close, specifics on any non-compete or consulting arrangements, specifics on any property or other leases (or purchases), and any conditions to the offer.
Once accepted, you can develop a more formal letter of intent (LOI) to be reviewed by an attorney and signed by both parties. Self-drafting the LOI ensures the more formal, legal language of an LOI does not impede the seller's understanding of your offer, and helps to minimize attorney involvement.
Takeaways: How to Structure a Deal
How can I build trust with the seller?
How can I work with the seller to reach a fair transaction agreement?
What are the key points of my offer?
Read the next chapter, How to Conduct Due Diligence or download the complete e-book: How to Buy a Digital Business.
Images from Pixabay