Guided by our business broker, we have made a conditional, non-binding offer to purchase a business at a price (below market) and terms that would work for us. We set out a time for response, a closing date, financing, training and transition, what was included and excluded, and provided a deposit for the broker to hold in trust.
We have now received a counter offer and are into negotiations.
The negotiations will be conducted through our broker—not directly. They are experienced in business acquisitions and can guide us through the process with advice and impartial sober thought.
We need to understand what is behind the seller’s changes—he or she may have changed the structure of the purchase from assets to shares.
Purchasing assets or shares
Buyers usually prefer to purchase the assets of the business including intellectual property, the right to use the name, telephone number, websites and all the tangible assets. If purchasing the assets at market value we may be able to achieve a greater depreciation expense going forward and reducing our taxes in future years.
If we purchase shares rather than assets we inherit liabilities. An audit next year of last year’s tax return and financials may result in a liability to Revenue Canada. A previous employee may sue the company for wrongful dismissal or for an injury sustained on the job. There may be product liability issues.
Sellers tend to prefer a share purchase as this structure enables them to take advantage of the $835,715 capital gains tax exemption (for 2017) provided their business qualifies. This may save them considerable taxes.
We may be prepared to accept the possibility of hidden liabilities if the seller is prepared to provide significant financing for our purchase and we include a right of offset in the note. To some extent this will depend upon the exposure and risk we are assuming. If the seller has been conservative and meticulous in their record keeping and taxes we are in a position to negotiate the structure of the transaction. For instance, in return for us agreeing to accept a share structure, we may negotiate increased financing from the seller and perhaps a lower price. This enables us to share in the benefit the seller achieves through a share sale.
Giving to get
The general rule in negotiating is that we do not want to give up concessions without getting concessions in return. Even though the concessions we are making may be unimportant to us they may have significance to the seller. We may not know which items are significant to the seller.
If we will be highly dependent on seller-provided training going forward we should insist that they protect us in the event that they are unable to provide the training and mentoring. This may take the form of critical illness insurance and life insurance on the seller payable to the company we are acquiring.
In exchange for adjusting to a closing date that the seller wants, we may negotiate items that we want such as a longer training and transition program, a lower interest rate on the seller-provided financing, modifications to the payment plan allowing us a grace period after closing, and so on.
Everything is negotiable BUT our goal is to acquire a business on price and terms that enable us to earn sufficient income to support our family, to service the debt to pay for the business over a reasonable period of time and to provide a return on our invested capital.
We must be prepared to walk away from the opportunity if we cannot negotiate terms that work for us.
Our offer contains many conditions related to the diligence we will go through after agreement on the offer. Our goal at this point is simply to arrive at an agreement that works for us. Many failed negotiations result from buyers who think that the goal is to get the lowest price and the best terms possible. If the deal does not work for the seller it will not work at all.
Listen carefully to your broker. They will provide as much information as they can on the seller’s motivations and can help you arrive at a deal that works for you and the seller.
Your broker will typically make adjustments or modifications to the offer, have you initial the changes, and take it back to the seller for discussion or they may redraft the Letter of Intent (LOI), Memorandum of Understanding (MOU), or Offer to Purchase, and take the revised version to the seller for discussion. Offers may move back and forth multiple times—each time you will learn something further about the seller’s priorities and concerns. Once you have agreement, it is time to start the next phase. This includes planning of due diligence and arranging financing.
Our next post in this set will deal with due diligence.
The original version of this updated text was published online in our At the Broker’s Table series and included in my book Insider Tips on Buying a Business in Canada. Stop by one of our offices across Canada for your free print copy. Or you can download a pdf copy here.