Price or Terms: The Structure of the Deal

An old saying in negotiating the sale of a business goes like this: The buyer says to the seller, "You name the price, and I get to name the terms." Another saying used to explain the actual value of the term full price: "If we could find you a business that nets you $250,000 a year after debt service, and you could buy it for $100 down, would you really care what the full price was?"

It seems that everyone is concerned only about full price. And yet, full price is just part of the equation. If a seller is willing to accept a relatively small down payment and carry the balance, a higher full price should be expected. On the other hand, the more cash the seller wants up front, the lower the full price. If the seller demands all cash, barring some form of outside financing, full price lowers - and, in most cases, the chance of selling decreases as well. Even in cases where outside financing is used, such as through SBA, etc., the lender will do everything possible to ensure that the price makes sense.

Buyers should understand that the structure of the actual sale (and how that structure meets the seller's reason for selling) can dramatically influence the asking price. Price is obviously important, but other factors may be even more important. For example, consider a seller with health issues who needs to sell as quickly as possible. In his case, timing becomes more essential than price. Another seller may place more importance on her business remaining in the community. In her case, finding a buyer who will not move the business may supersede price or certainly influence it.

Likewise, the structure of the deal can both influence price and be a more significant factor than price to either the buyer or the seller. The structure can dictate how much cash the buyer must pay up front. A low down payment may be important for some buyers. On the other hand, buyers should also be aware how much the interest on the carry-back can add up to. If the buyer can afford a higher downpayment while still retaining sufficient funds for running the business, a lower full price may be obtained with less paid in interest over the following years.

These examples all demonstrate the importance of working with a business broker professional when considering the purchase of a business. During this meeting, the broker should find out what is really important to the buyer, help the buyer understand what he or she can afford, and educate the buyer on the business transaction process.