About.com posted a review of John Warrillow's excellent book, Built to Sell, which is about how to create a business that another party will want to buy. We received a lot of reaction from business owners and others, and attorney James C. Roberts III, Esq. of Global Capital Law Group PC offered some helpful hints for those small business owners in the process of negotiating to sell their business. Here are his tips.
- Know When to Fold 'Em: Everyone should have what is called a BATNA--Best Alternative to a Negotiated Agreement, also known as a walkaway point. Be prepared to walk away. If the business seller does not want that, then he or she should have a floor price -- which would be another way of having a walkaway point.
- Use a Licensed Broker: If the seller is using a business broker, make sure that he or she is properly licensed. If not, then there are regulatory risks that can come into play even after the deal is done.
- Know the Broker's Motivation: Business brokers may be very useful but the seller (or buyer) should keep in mind that the broker's interest is in closing the deal. The authors of Freakonomics point out why brokers (in their book, real estate agents, but it applies in this situation) are not that interested in getting the price to jump.
- Dispute Resolution: Arbitration is often the best way to go for dispute resolution but we prefer a structure that requires the accountants of the two parties to meet and try to resolve it and if they cannot then only the written opinions of the CPAs and supporting documentation can be submitted for consideration by the arbitration panel.
- The Dreaded "Earn Out": Earn-outs are not necessarily a good thing to enable transition, but they can be a good thing if they are less than 10% of the purchase price and in addition, that there is a bonus for certain milestones (such as new clients and new work from old clients). If the seller does take an earn-out then he should have his own budget for accomplishing the milestones.
- Non-Competes: Sellers in California [and elsewhere] can be subject to non-compete provisions (which are usually unenforceable in California).
- The Term Sheet: The buyer and seller should negotiate several rounds on a term sheet, written in plain English (though with help from their legal counsel). I emphasize "several rounds" because the final term sheet (which should be non-binding and must say it is non-binding to in fact be non-binding) should be very, very detailed. Otherwise, they will negotiate on the agreement, which gets complicated and expensive. In fact, the term sheet can be longer than the final agreement, but that is fine, as it should be a roadmap for the lawyers to draft the appropriate agreements.