In reality, business buyers and business sellers want the same thing; the best price possible. Unfortunately, in times of economic uncertainty the distance between their two desired prices becomes increasingly difficult to reconcile. This feature article as well as the next one will be discussing methods through which a seller and buyer can agree on price.
A business buyer wants a price that both adequately justifies the risks involved in a business sale, and a price that outweighs the returns of an alternative purchase elsewhere. A business seller needs a price that both satisfies their reasons for selling, and outweighs the alternative of continued ownership.
The seller’s criteria can’t change, nor can the buyer’s alternative purchases. Of all of these criteria, the only one that can be changed is the risk, and if the risk is lowered, the buyer can justify a higher price. Unfortunately, by the time most sellers and buyers come to this realisation, it’s far too late to reduce risk by conventional means. If you’ve found yourself in this position start taking notes, because it’s looking more and more like this decade will require a little more ingenuity, creativity and teamwork to get your business sale across the line.
Not all of these approaches will be applicable or even appropriate for all business sales, but the point is to think outside the box when caught in a stalemate over price. Most sellers would certainly prefer the idea of making a clean break from their business, but signing up for a little extra work after the sale can prove to be an extremely effective tool during negotiations.
Part 1. Design an effective handover period.
This approach costs you nothing but time and can be an extremely effective tool in alleviating the perception of risk. A good handover period can involve any of the following:
a) Trial period. A trial period is a pre-sale arrangement whereby the potential buyer is allowed to spend a period of time working in the business in order to both verify the cash flow and to learn the ropes on the job. This proves particularly effective for situations where the buyer is sceptical about the business’s week-to-week success, or in situations where the buyer is uncertain about what might be involved for them as a new owner. A trial period is not necessarily designed to teach them how to do the job, but to show them that they can. Remember, a trial period’s primary purpose is to help a buyer make the decision to buy.
b) On-site Training. Training generally takes place after the exchange of agreements and can be a useful tool in alleviating risk. Generally, a training period will last between two and four weeks though it can be considerably longer depending on the size and complexity of the business. The vendor will stay, working in the business, gradually taking steps to phase themselves out, and install the new owner. The reason for this is that if the buyer is made certain that once they take over the business they will able to continue to run it effectively their perceived risk will be reduced, and all it costs the seller is time.
c) Introduction to Clients and Suppliers. This should take place after the sale and during the training period. By offering introductions, the buyer can be assured that all of the relevant clients and suppliers will continue to deal with them to the same degree as with the current owner.
d) Ongoing Phone Assistance. Phone assistance subsequent to the sale and training period is another useful tool. Even with training offered, a cautious buyer will be concerned with the ‘what if’s’ that mightn’t be covered during the training period. This of course doesn’t cover future business issues, but situational solutions. For example, a database needs updating and it would make sense to use a developer familiar with the system. They could simply call you and get the name of the developer who set up the system in the first place.
e) Non-Competing agreement. To remove the concerns of the buyer, a clause should be written into the contract for the sale of the business that the seller will agree to not compete with the buyer for a period of usually five years. Though this is very commonplace these days, it’s still worth mentioning.
This entire approach is becoming more common than uncommon with business sales today. Most businesses you see on the market will have elements of this style of handover period included or on offer with the sale.To reiterate, the advantage of a good handover period is that though it costs sellers nothing but time, it is one of their most useful tools for alleviating the concerns of a buyer. A good handover period could make the difference between your business selling and not selling.
Keep an eye out for Part 2. Vendor Finance & Earn-Outs.
- By Zoran Sarabaca
Principal Xcllusive Business Sales
Sell your business with Certainty
Disclaimer: All information in this article is for information purposes only. It should not be taken as financial, legal or any other advice. Individual circumstances of businesses and business owners may vary and have not been taken into consideration in this article. Always seek independent legal and financial advice for any matters regarding business sales.