The best buyer for your business may not be the buyer that offers the highest price.
Business sellers can become so focused on the offering price for their business that, at times, they will overlook a number of other factors that may prove more significant in the deal than the actual price. For example:
1. Financial Capabilities of the Buyer – This is not the amount the buyer is willing to pay for the business but rather the overall financial strength of the party making the offer. In today’s tumultuous lending environment not all buyers can actually produce the funds needed to purchase your business. A properly capitalized buyer with a slightly lower offering price may be worth more consideration than chasing a higher offer from a cash strapped buyer.
2. Industry Experience – Oftentimes, as small business owners, post-sale customer service and employee retention is just as important as your actual exit from the business. Especially when your compensation is tied to the future performance of the business. The practice of tying the seller’s compensation to the future performance of the business is common in the sale of service oriented businesses and is referred to as an earn-out.
3. Liabilities – Depending upon whether the transaction is structured as an asset deal or a stock deal, certain liabilities may remain with the seller post-sale. The ability to transfer liabilities to a buyer may make a lower offer more attractive than a higher offer where liabilities remain the seller’s responsibility.
4. Taxes – NEVER FORGET ABOUT TAXES!! In any transfer of ownership there is always an adverse tax effect. The question becomes with whom does the tax obligation lie? Depending on the structure of the transaction and the potential allocation of purchase price, there can be a significant difference in how the IRS views the transaction. A buyer will (in all likelihood) be looking for an asset deal with the majority of the value allocated to operating assets to achieve a step-up in basis and a quick depreciation write-off. On the other hand, you as the seller will be looking for a stock deal or an asset deal with the majority of the value attributable to capital assets to achieve capital gains tax treatment on the proceeds in excess of basis.
Rarely when buying or selling a business is the structure that’s best for the seller also the best for the buyer. There is always give and take. Experienced buyers and their experienced advisors know that the offering price is only one small part of the deal. There are a number of other things that qualify an offer as “good” or “bad”. Be sure to consider the entire offer, including: price, the ability of the buyer to pay, the buyer’s experience within your industry, what liabilities (if any) will transfer and who is responsible for the impending tax obligation.
