CHAPTERS 7 & 8: Negotiating the Best Terms, and Understanding Financing for a Win-Win Business Sale

Negotiating a business sale can be a delicate process. Striking a deal that benefits both the buyer and the seller is key to ensuring long-term success. In his book “Lucrative Exits,” Gregg Kunz explores strategies for negotiating a win-win business sale. Creative financing options, understanding seller financing, and leveraging available financial tools are also discussed as a critical component to securing the best deal for both sides. These insights can help buyers overcome financial hurdles while ensuring sellers receive fair compensation.

Read through the seventh and eighth chapters of his book for FREE now:

CHAPTER SEVEN

Win-Win Negotiations

After months of preparation, marketing, and discussions, your business has attracted attention in the market, leading to several promising interactions with potential buyers. The anticipation builds until you receive the phone call from your broker, “We have an offer!” This moment marks the beginning of the next critical phase in the business sale process – the negotiation and deal-structuring stage.

This phase begins with the buyer submitting a Letter of Intent, expressly stating their requirements for the terms and structure of the sale transaction. The LOI is the general framework for the transaction. It will be significantly expanded in the closing documents, including the Asset Purchase Agreement, Bill of Sale, Non-Compete Agreement, and others, as well as additional associated schedules and exhibits. While the LOI is not a binding agreement in most states, it will become the foundation upon which the entire sale transaction will be built.

The first thing to understand is that although the agreement in and of itself is not binding, there are two elements of the LOI that are: confidentiality and non-solicitation. The parties agree that confidentiality must continue to be maintained by the parties – this means that both the buyer and seller (and their advisors) must not disclose to anyone other than the parties that they have entered into negotiations or that the business is for sale. Non-solicitation means that as soon as the LOI is fully executed, the business is removed from the market, and any communications with other parties must cease immediately. Aside from these two binding elements of the LOI a buyer or seller can cancel the LOI for any reason, including no reason at all.

It is important to outline the high-level details of the transaction, and the parties must understand that overly rigid or loose elements can lead to misunderstanding, misinterpretation, and stress which may create an adversarial relationship between the parties.My recommendation is that you retain legal counsel to review the LOI prior to executing it. Understanding and balancing the importance of each element cannot be overstated.

Core Elements of the Letter of Intent

Total Sale Price: The total financial consideration for the sale of the business.
Buyer Cash Down Payment or Equity Injection: The cash amount the buyer will contribute to the purchase.
Lender Injection Amount: The cash amount the lender will put into the transaction, excluding additional monies for working capital, lines of credit, or loan costs.
Seller Financing Amount (if required): The amount the seller will finance as a part of the transaction.
Number of Payments over Time Period: The number of installments to be paid by the buyer and the number of months the note will be paid.
Interest Rate: The rate of interest the seller note will be subject to.
Calculation of Interest (Simple or Compounded): The determination of how the interest will accrue on the seller note.
Inventory Amount: If inventory is included or excluded in the total sale price and the method in which the value will be calculated, normally at the cost value.
Description of Business to be Conveyed: (including Real Property if applicable).
Working Capital (if applicable): The amount of cash or accounts receivables to remain in the business at closing to enable the buyer to meet the near-term expenses required to operate the business after closing.
Closing Date: The target date for the closing to occur.
Confidentiality Statement: This statement defines the duration of the period during which neither buyer nor seller teams can disclose that the business is for sale.
Exclusivity Period: The start and end dates of when the business will be withdrawn from the market and during which no conversations can be had with other potential buyers.
Earnest Money Deposit Amount and Escrow Agent: If appropriate, the good faith cash amount will be held by the escrow agent and applied to the buyer’s cash down payment amount.
Due Diligence Term and Start Date: The duration of the due diligence period and the start date. These tend to range from 14 to 60 days, with the buyer usually requesting a longer period and a shorter period by the seller.
Lease Details (Assignment or New): A statement outlining if the seller’s lease will be assigned to the buyer or if the buyer will need to obtain their own lease.
Termination Statement: The date upon which the LOI will terminate if the parties have not executed an Asset Purchase Agreement or Purchase Sale Agreement (Real Property).
Governing Law: The state in whose laws the transaction will be subject to.
Sale Type: The determination of the type of sale – Asset or Stock sale.
Expiration Date of LOI: The date on which the LOI will expire unless fully executed by both buyer and seller.
Contingencies: An additional termination trigger for the buyer after the due diligence period for failing to obtain a lease or transaction financing which are acceptable by the buyer.
Training and Transition Period: An outline of the period of time, hours per day, and on-site or remote training that the seller will provide to the buyer.

Evaluating Offers

When we receive an LOI we review it in depth to understand each element of the offer so that we can anticipate how our client, the seller, will likely receive it. If the LOI is missing key elements or includes what I know will be deal killers, I will communicate these to the buyer to seek clarification and advise them on the initial pressure points. Savvy buyers should take these to heart and know that the broker is keenly aware of elements which are likely to be problematic to the seller.

Those buyers who are dismissive of our advice often find themselves creating adversity from the start. As fiduciaries of our seller clients, we represent their interests first and foremost, which means that we also need to provide the buyer with our objective advice – which many times is different from what they want to hear. A poorly crafted offer is best rejected early so that deal killers can be avoided and a productive conversation (negotiation) may begin.

Once we review the initial LOI and address any early potential issues with the buyer, and it is agreed that the LOI is ready to be presented, we schedule a time with the seller to walk through the document point by point. Sellers (and buyers) should understand that the first LOI is a starting point. Taking a deep breath and evaluating every point on its own merit is encouraged so that together, we can determine those items we are willing to accept or reject, and those that will need to be negotiated. Keeping the overall objective in sight and seeking a win for both parties is critical. Sellers should take at least 24 hours to let their thoughts and emotions settle after which a serious conversation with their broker should determine how best to proceed. LOIs typically contain an expiration date of 3 to 7 days, so negotiations must commence without a lengthy pause. Maintaining momentum once a buyer is engaged is paramount to a successful outcome. Remember that time kills all deals.

Buyers and sellers should expect counter offers as they are a part of the LOI negotiation process. An experienced broker should have developed a working relationship with the buyer and can speak candidly to support their client’s counteroffer. Remembering that most buyers really want to complete a transaction will help grease the tracks for productive negotiations. Digging in one’s heels, grandstanding, creating unneeded adversarial positions, or allowing ego to enter the negotiations are sure ways to derail what may be the best offer the seller will get. Seeing things from both party’s perspectives will help. The broker should also have the guts to explain to their client when an offer or request is fair and warranted. A few years ago I had a seller client say to me “you represent our interests and it seems that you are agreeing with the buyer!” Sellers must understand that they engaged the broker to represent them and their interests to produce a successful transaction, not to agree with them if the buyer’s contention is valid. In this particular case the buyer’s point was extremely reasonable and the seller simply did not appreciate the undue risk it would create for the buyer. Brokers who have a depth of business experience should be able to look at risks from both sides and explain to their seller (and the buyer) when one side is being unreasonable. Sometimes it is not the intent of one party attempting to take advantage of the other, but rather the lack of real-world business acumen on the part of the other party.

One not-so-smart technique I have seen is the submission of a blind offer. A blind offer is one from a buyer who has not had at least one in-depth meeting with the seller. These should be rejected. The underlying goal of these “buyers” is to appeal to the seller’s emotions with a full or even higher than full-price offer so that the business is taken off the market while the buyer tries to find funding or initiate an extended due diligence period. It’s easy for a seller to become fixated on what appears to be a spectacular offer and dismiss some ulterior and painful motives. With the excitement and enticement of a higher (and many times unwarranted) offer the seller may begin to concede items associated with the sale. This “nibbling” by the buyer can erode the seller’s negotiating strength as the days tick by. On the day the due diligence period expires, these types of buyers will tell the broker that they want to re-trade (change) the price. I cannot express it strongly enough: reject blind offers no matter how good they look. Inexperienced brokers tend to stray from the correct process when a (likely) too-good-to-be-true offer is presented. Great brokers became such because they are driven by, and stick to their process, and do not allow the buyer’s process to supersede theirs. Allow the process to work its magic.

Negotiation Principles

Both parties must understand their absolute “must haves” and be willing to concede items that may impede their ability to secure the truly important ones. We advise our clients to put themselves in the other party’s shoes and determine the item’s overall importance in completing a favorable transaction. Both parties should be winners in the transaction, fairness should prevail, and petty items should be removed or conceded – although they can be used as a negotiating ploy for the give and take which accompanies all negotiations. We generally recommend never digging in over inconsequential or meaningless items that may cause distrust or create animosity for one party or the other. View and evaluate the entire offer in the whole rather than dismissing it out of hand based on one or two elements which while they may be not exactly to your liking, may be critical to getting an otherwise good deal done. The cliche that it is not a good negotiation unless both parties are a little disappointed never resonated with me. ‘Give and Take’ is a part of the negotiation process and you should understand this from the start.

Over the years, we have seen seemingly strong win-win transactions go sideways because one party forgets or dismisses the overarching objective: to sell and buy the business on favorable and fair terms for each party. The business sale process is an emotional undertaking for both buyer and seller. An experienced broker will hand-hold each party in the weeks leading up to the closing while reinforcing that the emotions of each are normal and to be expected. This is one of the most critical times during which the broker’s experience will keep everyone on a steady course – especially by sensing what is likely behind odd, and other seemingly meaningless or irritating requests from the buyer. Remember that this may be the buyer’s first transaction and because they lack your depth of experience, the items they ask for or about while inconsequential to you are of concern to them.

Due Diligence

The due diligence period is one during which the buyer is entitled to ask virtually any question and see virtually any document in order to be comfortable with the end result – the business purchase. It is a confirmatory process meant to confirm the accuracy of the information which has been presented. On occasion a buyer will ask for sensitive information which should not be released at this stage of the process. We always tell them why so that our refusal makes sense from a purely business standpoint, not to be obstinate. This is an opportunity to continue to build trust with the buyer, which goes a long way toward a smooth transaction. Any perceived evasiveness from the seller will create shadows on the business, likely to result in a failed transaction.

Sellers should enter the due diligence process with a sense of urgency, clarity, openness, and willingness to provide the details and documentation requested by the buyer. Anecdotally, as many as half of all deals terminate during due diligence. Either party can terminate the deal, but in most cases, if the broker has adequately prepared the business for sale and both the seller and buyer are coached to understand the process, success is more likely. The broker must manage unreasonable and unrealistic buyers at all times, especially from the beginning. Customer, supplier, and employee names should only be provided to a buyer during due diligence in exceptionally rare circumstances. Intellectual property, customer and employee details, processes and procedures, passwords, etc., should always be handled with care. The specific details may be released once due diligence is complete and accepted, but key details should only be disclosed upon the closing of the transaction. Your broker should maintain a secure Data Room for all documents relating to the transaction. Information can be placed in the Data Room appropriate for each stage of the process which will make updating and accessing information efficient, timely, and with security measures to control who has access and when. We begin to populate our Data Room well before our client engagement agreement is executed. This allows us to have the information we need at every point of the preparation and transaction process and it also provides a repository for the client to add the dozens of documents which will eventually be required to complete the sale. The sale process is stressful enough without the added burden of a mad scramble to add documents.

The due diligence process should consist of clear and objective information sharing with a sense of collaboration. Before starting the process, the broker should explain each step, be the conduit for all communication between the parties, and track the progress of each information and document request and fulfillment. Further, the broker should advise both parties that they may become stressed during the process and that the broker should be the first point of contact when emotions begin to run high. This will help temper emotions with the broker acting as the voice of reason so they can deliver the message without emotion. Issues and concerns should be taken at face value and clearly articulated. Sincere and objective questions deserve an honest and objective answer to the buyer’s satisfaction.

Due diligence is invasive. Sellers may wonder what is at the root of a buyer’s question and buyers may not like the seller’s answer. The broker should orchestrate the process well, as they are responsible for gathering and distributing documents, fulfilling requests, providing answers, and managing the process to completion.

The Costs of Selling a Business: What to Expect

The costs of selling a business tend to fall into the following categories:

Broker Engagement Fee: These range from zero to as much as $25,000, and in most cases, this fee is credited back to the client at closing against the success fee. If the business does not sell, the engagement fee is the broker’s to keep. If the broker requests an engagement fee greater than $10,000, I recommend asking what this is for. If it is for marketing or some other expense that you believe the broker should incur, you may want to reconsider your choice of broker. A competent broker should invest in their business and success, not ask you to bear the risk.
Engagement Retainers: It’s not my place to judge whether these ongoing monthly invoices are permissible, but our firm rarely enters into these types of arrangements. I’ll allow the reader to do the math with this simple caution: If the broker will earn a substantial amount of income from an ongoing retainer income stream instead of a fee made upon a successful outcome, then it is likely it is in the best interest of the broker to drag their feet. M&A firms have a different model appropriate to the segment of the market they serve. In most cases, the retainer monies paid during the engagement are credited in whole or in part against the final success fee at closing.
Broker Success Fee: For Main and Premier Main Street businesses, this ranges from between 8% and 12%. If a broker is willing to work for 8% (or less), the odds are high that they are grasping for business. 12% for a business with underlying issues and a higher-than-average unlikelihood of selling may be reasonable. I’ve yet to meet an experienced and successful broker who will discount their success fee. If they do, remember that if they are willing to cave in on the value of their expertise (and income), that may be a leading indicator of how they will negotiate on your behalf. Trust me, brokers earn every dollar – especially when they make it look easy and minimize the distractions to you during the sale process.
Attorneys’ Fees: Besides the brokers’ fees, attorneys’ fees are the next largest cost to both seller and buyer. Do not underestimate the importance of experienced and competent legal representation; do not rely on anyone other than a business transaction attorney to represent you. This is a very specialized segment of the legal profession, affecting not only your transaction’s success but your potential exposure post-transaction. This is no place for your family attorney or a general attorney. Depending on the complexity, fees for a simple transaction may be as low as a few thousand dollars or even approach a six-figure bill. Interview two or three transaction attorneys to understand their fee structure and personality. They are an essential part of your team and hesitating to pick up the phone for fear of running up your bill should be secondary to getting the protection they provide.
Title, Recording, or Escrow Fees: Depending on the state where the transaction will be completed and the presence or absence of real property a title or escrow company may participate.
Accounting/Financial Advisory Fees: Sellers are urged to include their accountants or tax advisors in the sale process. Depending on many factors, these costs can range from a few hundred to thousands of dollars.
Lender Fees: No fees associated with the buyer’s lender should ever be borne by the seller unless the parties have agreed in advance.
Taxes & Transfer Fees: Depending on your locality there may be a variety of taxes or fees due at or shortly after closing.
Other Fees: Like many things in today’s world it’s the questions we don’t ask that create financial surprises. Ask each professional on your team what costs to expect. Your broker cannot anticipate all potential costs nor those you will incur from each advisor.

The deal-making process requires strategic thinking, emotional intelligence, and a deep understanding of the legal and financial aspects. Every element of the Letter of Intent, from the total sale price to the finer details of confidentiality and exclusivity, plays a role in shaping the outcome of your business sale.

In business transactions, the art of negotiation emerges as a key driver of success, creating a mutually beneficial agreement that respects the interests and goals of both buyer and seller. Trust in your advisors and your instincts as a business owner who knows their business best.

KEY TAKEAWAYS

The Letter of Intent (LOI) is the starting point in the buyer engagement process, laying the groundwork for the transaction, with confidentiality and non-solicitation as key binding elements.
Successful negotiation hinges on understanding and balancing the importance of each element in the deal, avoiding rigidity or ambiguity that could lead to misunderstandings or an adversarial relationship between the buyer and seller.
Know your “must haves” in the negotiation, be willing to compromise on less critical items, and always strive for a win-win outcome that is fair to both buyer and seller.
The due diligence phase should be approached with transparency and preparedness, as it can often make or break the deal, with an emphasis on protecting sensitive business information.
Brokers should have the intestinal fortitude to tell their sellers when a buyer presents a bona fide objection or a counter offer to an item within the LOI. Remember that your broker is there to guide you to get the best transaction possible. You are not paying them to agree with you.
The costs of selling a business vary and include broker fees, legal representation, and other potential fees. It is advisable to discuss the fees which might be associated with your unique transaction.

CHAPTER EIGHT

Financing the Business Purchase

Generally speaking, three main components are involved in purchasing a Main Street business. This chapter will focus on the full acquisition of the business, where all of the seller’s equity interest will become the buyers. There are certain instances where a portion of the seller’s equity will remain in the business, effectively allowing the seller to remain an owner. As recently as 2023, the SBA (Small Business Administration) updated its rules to allow a seller to retain an equity interest, but absolute clarity remains uncertain. For the purposes of this chapter, we will focus on the more traditional components:

Buyer Equity Injection or Cash Down Payment
Lender Financing
Seller Financing

The Equity Injection

As highbrow as the term sounds, equity injection simply refers to the cash down payment made by the buyer for the business. In essence, it is the immediate equity interest in the business, with the balance of the equity coming from the lender. In cases where the seller is extending some degree of financing, the seller does not retain any equity. Depending on the lender and financial strength of both the business and the buyer, cash down payments will usually be between 10% and 20% of the purchase price. It is left to the lender to determine the final amount of the cash down payment requirement.

Lender Financing

Before we jump into the lender financing part of the sale transaction, it is important to understand the basics of Small Business Administration (SBA) lending. The SBA was created in 1953 as an independent government agency of the Federal government to promote and protect the interests of small businesses. In 1954 the SBA created a program which guaranteed loans to small businesses and buyers of those businesses to encourage lenders to provide financing. Prior to this program the sale of small and medium-sized businesses was significantly constrained by the lack of assets owned by the business that the lender could collateralize. With few assets to take possession of and dispose of, the risk to lenders was so great that it was virtually impossible for a lender’s credit policymakers to participate in a sale transaction. The Small Business Administration (SBA) was created to, among other things, generate liquidity in the market to encourage lenders to participate.

A common misconception is that the SBA lends money. It does not. Think of the SBA as an insurer to the lender. The SBA will insure a portion of the acquisition loan if the buyer (debtor) cannot make the payments, and the loan must be written off. Currently, the SBA will guarantee the loan for between 50% and 75% of the loan amount (The SBA Guarantee). This risk reduction to the lender makes it more attractive for lenders to participate in business sale transactions.

Simply stated, the SBA creates guidelines for lenders to comply with to receive the SBA guarantee. However, each lender has unique (and often rigid) internal credit guidelines. Choosing the right lender is critical to getting the transaction to the closing table. Not only do SBA lenders pick and choose which types of businesses and transactions they will lend to, but the ability to complete the loan depends on the quality of the lender team. This includes the client-facing Business Development Officer, the Credit Committee, the Underwriter, and the Closing Coordinator. Each plays an important role in getting to the closing table. Virtually every bank in the United States can participate in the SBA lending program, but only a select number do it often and well, and are included in the SBA’s Preferred Lending Program (PLP).

Before we bring a client’s business to market, we reach out to multiple SBA lenders to have the business transaction pre-qualified so that we have strong confidence that the business sale can be completed. Experienced brokers will likely have a short-list of SBA lenders that they know are able to get a transaction across the finish line. Unsophisticated and first-time buyers far too often engage with SBA lenders who promise that a deal will get done only to receive a “no” from the lender 30 or 45 days into the transaction process. Buyers are well-advised to seek the advice of a business broker early in the process and to be referred not only to the SBA lenders who they know will lend to the business and particular industry but also to lenders who have demonstrated the ability to complete the transaction.

Seller Financing

The topic of seller financing is raised early in conversations with our seller clients and virtually all conversations with buyers. Buyers and lenders believe that a seller having “skin in the game” and “confidence in the business” is critical to the sale and provides safety to each. While this may strongly resonate with a buyer, the lender is much more concerned with the risk of their capital, and passing a portion of this risk off to the seller is usually the underlying objective.

In addition, if a buyer does not quite have the cash down payment necessary to make the numbers work, the SBA guidelines allow the buyer to make up the down payment shortfall with a seller financing component. For example, on a million-dollar transaction, the lender may require a 20% down payment by the buyer. If the buyer only has $150,000 (or the lender wants the buyer to retain more of their cash in the bank for a cushion), the 5% shortfall can be made up by the seller providing $50,000 in seller financing. If the numbers are close, this can get a deal done, but what are the risks to the seller, and is their “skin in the game” really material?

We always recommend that our sellers be open to seller financing if absolutely required, but we always seek a full and final cash-out without it. Buyers will need to guarantee the seller note personally, but it remains in second position behind the loan and at least in second position to the mortgage on the buyer’s other major asset, their home. As a fiduciary to our seller client, why would we set them up for this risk? We hold the seller financing card in our hand and only reveal it as necessary. Seller financing, and the contractual instrument which outlines the terms of the Seller Note is usually secured with a personal guarantee by the buyer. However, each state has its own laws as to the limits of personal guarantees. The seller’s attorney can best describe how and to what degree the Note can be enforced in the event that the buyer defaults on their debt payments.

The idea of “skin in the game” is a fallacy. Once the transaction is complete and the seller has dutifully provided the buyer with the training and transition period, the only person with “skin in the game” is the buyer. As a seller, be open to it only if the lender requires it.

For businesses where a lender will not participate, and there are many, offering seller financing may be the only path to selling the business. This does not mean a business is necessarily bad, but it may have too many areas of softness in the lender’s eyes to meet their underwriting criteria. An experienced and objective broker should be able to tell you early in the process if seller financing is likely to come into play.

Another aspect of the transaction may include “earn-outs” or “forgivable seller notes.” We will only delve into these here to provide a basic overview. Let’s return to the above million-dollar transaction. The seller may want or need to sell today but feels that the business’s recent and near future financial performance should support a higher selling price. This is the seller intent on a sale price above what the buyer and their lender will pay at closing. In these somewhat rare occasions, the buyer may agree to the higher sale price, but the terms will dictate that the additional proceeds will only be paid out if and when the business produces the projected financial performance. In these cases, the earn-out should be tied solely to revenue performance and never to net income performance. A new buyer is likely less tempted to defer revenue growth than to manipulate expenses. A seller should never agree to an earn-out based on net income. SBA guidelines do not presently allow earn-outs but have recently agreed that an earn-out structured as a forgivable seller note, or series of forgivable notes may be acceptable.

KEY TAKEAWAYS

In purchasing a Main Street business, three main components are typically involved: Buyer Equity Injection or Cash Down Payment, Lender Financing, and Seller Financing.
Equity injection refers to the buyer’s cash down payment, usually between 10% to 20% of the purchase price, which varies based on the lender and the business’s and buyer’s financial strengths.
Lender financing, especially through SBA programs, is crucial in business purchases. The SBA acts as an insurer, guaranteeing a portion of the acquisition loan, thereby reducing risk for lenders. Understanding the SBA’s guidelines and choosing the right lender is essential for a successful transaction.
Seller financing is often discussed early in the transaction process. It’s seen as a way for the seller to maintain “skin in the game,” although the primary objective is often to pass on a portion of the risk to the seller. Sellers are advised to consider seller financing only if absolutely required.
“Earn-outs” or “forgivable seller notes” may be used in transactions where the business’s future performance might justify a higher selling price than what can be paid at closing. Earn-outs should be tied to revenue performance rather than net income. Not all SBA lenders will allow a forgivable seller note as a part of their lending criteria.
The SBA guidelines for business transaction financing include a multitude of requirements but the ultimate approval of a loan will be the lender’s alone and consistent with its internal lending criteria. As such, not every SBA lender will participate in every transaction. Having your broker understand which lenders are likely to finance your business transaction should be done in advance of bringing the business to market. In this way they can help a buyer locate a suitable lender.