You might be successful at selling your business for a price you like, even when its earnings are down, if you and the buyer can agree to put off final determination of the selling price until some point in the future. There are a variety of strategies for bridging the gap when purchaser and owner can’t agree on the value of the business at the time that it changes hands.
But both parties need to agree to a rather innovative deal structure, and it’s important that terms of the agreement are very specific. Besides, it helps if there is substantial trust between the two.
The chief mechanism used in an agreement that can be closed before the final price is determined is the buyer’s promissory note used as part of the payment. The note represents the parties' written understanding that the buyer will make installments over a given period of time, with the amount of the periodic payments related to the total and final selling price. If circumstances dictate that values have increased since selling your business, the contract says buyer's payments will go up accordingly. And, if parties agree that this method should work both ways, a decline in business value will allow the buyer to make proportionately smaller payments, or payments over a shorter period of time.
Another part of this agreement is a clear statement on a number of factors. They include:
1. The starting price: Typically it's a figure lower than what the seller believes the business is worth. If, after an agreed-on number of months, certain fears of the buyer are realized--such as the business failing to grow, the landlord refusing to provide a lease renewal, or a key customer taking business elsewhere--that low price may become the final number and payments won’t change. If the negative outcomes that worry the buyer do not come to pass, the seller can look forward to the payments rising in proportion to an increase in price, reflecting the fact that the business is worth closer to what the seller wanted.
2. The factors that will influence a change in price: Whether or not the landlord cooperates when it comes time to renegotiate the lease, or the company’s financial performance improves along with a more robust economy, are among the "dependent factors" that buyer and seller might agree will influence price. It’s important to spell out in detail how each factor will be determined. For example, what are the specific terms that will bear on whether or not the landlord is cooperating, for purposes of triggering a change in selling price?
3. The formula to be used: Parties need to be in agreement about the method of mathematically translating the occurrence or non-occurrence of the dependent factors into the change in price. You and the buyer might agree, for example, that a ten percent increase in annual revenues will warrant an equal increase in the selling price, and a corresponding increase in payments on the note.
4. A means of verifying the changes in dependent factors: If the buyer says the hoped-for improvement in the circumstances has not taken place, the seller should not be expected to take the buyer’s word without clear evidence that supports the claim. That means the business books need to be open. And the seller might be granted the right to speak with others (such as key customers or the landlord) whose decisions will influence how much the seller will receive.
5. Period of time: When will the final price be determined? There has to be a specified date at which time the final price is established, with no changes afterward. Additionally, there should be benchmark dates, perhaps every six months following close of escrow, at which time adjustments are made to the price, and the payments, according to the circumstances of the business.
There are other elements that need to be incorporated in such an agreement. These five are among the key points of agreement that should be reached if you are selling your business without a final price determination at close of escrow.
About the Author: Peter Siegel, MBA is the Founder of www.BizBen.com. His book, "Selling A California Business" is sold in local bookstore and online. BizBen.com offers business sellers free online webinars/educational events, and phone consultations on the best way to sell a California small to mid-sized business. Business owners/sellers can reach Peter Siegel direct at 925-785-3118.
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