Josh Correlli
As the owner of a business looking to sell, a lot of time, energy and money can be spent negotiating only a few of the initial deal points.
However, once the negotiations reach the stage of a definitive agreement, many new issues can arise that maybe were not initially contemplated. While every transaction is unique and other issues can arise, below is a quick summary of some of the most heavily negotiated deal points.
Likely, the most important term is the purchase price. A seller should conduct their research to ensure the purchase price is fair. There are many methods to determine the value of a business, and many consultants available to help make the determination.
Almost as important as the amount is the method of payment. Depending on the seller's situation, a seller may prefer to accept a lesser amount if the entire purchase price is paid in cash at closing as opposed to having to carry a promissory note for a period of years.
If the seller does decide to finance the sale, the seller should ensure that they have adequate collateral and perfected security interests as well as personal guarantees, if available.
Many times sellers allow the buyer to dictate whether the transaction is structured as an asset sale or an equity sale. A seller should consult their tax adviser early in the process in order to determine the different tax consequences, if any.
From a legal perspective, there is a “clean break” in liability in an asset sale, i.e., the selling entity has sold its assets and can therefore dissolve after closing. In the equity sale context, the selling entity continues after closing but is owned by the buyer.
Accordingly, an asset sale may be slightly preferred from a legal standpoint. However, post-closing liabilities will likely be addressed contractually in the purchase agreement regardless of how the transaction is structured.
During the initial stages of negotiation, oftentimes representations, warranties, and indemnification are not discussed, and if they are, the term sheet or LOI contains a short phrase stating that the definitive agreement will contain customary representations, warranties, and indemnification.
Buyers will obviously want the seller to provide unqualified representations and warranties regarding all aspects of the business. A seller must review these provisions closely to ensure that such representations and warranties are accurate and make qualifications where necessary.
The likely remedy for a breach of a representation or warranty is an indemnification. Indemnifications can be limited with a basket (a minimum amount of loss that the buyer must realize prior to seeking to enforce the indemnity), a cap on seller's indemnity obligations, and/or an expiration date on the indemnity obligations.
Furthermore, a buyer may request that some of the purchase price is held back either with the buyer or in escrow until such time that the indemnification obligations have expired.
The nature of the seller's business and the transaction will dictate appropriate conditions to closing. Common conditions may include performance by the parties, no legal prohibition, and accuracy of representations and warranties.
More specific conditions may include a landlord's consent to the assignment of the business lease or the buyer obtaining necessary governmental licenses and approvals.
A seller should keep the entire transaction in mind when negotiating a sale. Some buyers may attempt to negotiate one deal point at a time in order to gain leverage.
As a basic example, a seller may agree to a lesser purchase price if the entire amount is paid in cash at closing or may require a larger price if the amount is payable over time. If the amount and the payment terms are not negotiated simultaneously, the seller may lose some leverage.
It is important to use leverage when it exists, so getting a concession from the buyer in consideration for giving up on a deal point will help result in a better deal for the seller. Accordingly, it is important to have all of the deal points in mind when negotiating.
Kaempfer Crowell has offices in Reno, Carson City and Las Vegas. Josh works out of the Reno office. This article is for discussion purposes only and shall not constitute legal or tax advice. The author is not a tax or securities attorney. Go to kcnvlaw.com to learn more.
-->As the owner of a business looking to sell, a lot of time, energy and money can be spent negotiating only a few of the initial deal points.
However, once the negotiations reach the stage of a definitive agreement, many new issues can arise that maybe were not initially contemplated. While every transaction is unique and other issues can arise, below is a quick summary of some of the most heavily negotiated deal points.
Likely, the most important term is the purchase price. A seller should conduct their research to ensure the purchase price is fair. There are many methods to determine the value of a business, and many consultants available to help make the determination.
Almost as important as the amount is the method of payment. Depending on the seller's situation, a seller may prefer to accept a lesser amount if the entire purchase price is paid in cash at closing as opposed to having to carry a promissory note for a period of years.
If the seller does decide to finance the sale, the seller should ensure that they have adequate collateral and perfected security interests as well as personal guarantees, if available.
Many times sellers allow the buyer to dictate whether the transaction is structured as an asset sale or an equity sale. A seller should consult their tax adviser early in the process in order to determine the different tax consequences, if any.
From a legal perspective, there is a “clean break” in liability in an asset sale, i.e., the selling entity has sold its assets and can therefore dissolve after closing. In the equity sale context, the selling entity continues after closing but is owned by the buyer.
Accordingly, an asset sale may be slightly preferred from a legal standpoint. However, post-closing liabilities will likely be addressed contractually in the purchase agreement regardless of how the transaction is structured.
During the initial stages of negotiation, oftentimes representations, warranties, and indemnification are not discussed, and if they are, the term sheet or LOI contains a short phrase stating that the definitive agreement will contain customary representations, warranties, and indemnification.
Buyers will obviously want the seller to provide unqualified representations and warranties regarding all aspects of the business. A seller must review these provisions closely to ensure that such representations and warranties are accurate and make qualifications where necessary.
The likely remedy for a breach of a representation or warranty is an indemnification. Indemnifications can be limited with a basket (a minimum amount of loss that the buyer must realize prior to seeking to enforce the indemnity), a cap on seller's indemnity obligations, and/or an expiration date on the indemnity obligations.
Furthermore, a buyer may request that some of the purchase price is held back either with the buyer or in escrow until such time that the indemnification obligations have expired.
The nature of the seller's business and the transaction will dictate appropriate conditions to closing. Common conditions may include performance by the parties, no legal prohibition, and accuracy of representations and warranties.
More specific conditions may include a landlord's consent to the assignment of the business lease or the buyer obtaining necessary governmental licenses and approvals.
A seller should keep the entire transaction in mind when negotiating a sale. Some buyers may attempt to negotiate one deal point at a time in order to gain leverage.
As a basic example, a seller may agree to a lesser purchase price if the entire amount is paid in cash at closing or may require a larger price if the amount is payable over time. If the amount and the payment terms are not negotiated simultaneously, the seller may lose some leverage.
It is important to use leverage when it exists, so getting a concession from the buyer in consideration for giving up on a deal point will help result in a better deal for the seller. Accordingly, it is important to have all of the deal points in mind when negotiating.
Kaempfer Crowell has offices in Reno, Carson City and Las Vegas. Josh works out of the Reno office. This article is for discussion purposes only and shall not constitute legal or tax advice. The author is not a tax or securities attorney. Go to kcnvlaw.com to learn more.
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