Beware Of Seller’s Remorse When Buying A Business

It’s normal for a buyer to experience concern and apprehension as they close in on a deal to buy a business. What buyers often don’t anticipate however is being hit with remorse from the seller.

Except in cases where the seller is highly motivated and is forced to sell, it’s almost guaranteed they will experience remorse about selling. You can generally sense something is wrong by a change in their behavior. If they have been timely with all of their responses or in providing documentation and they suddenly slow down, it’s a telltale sign. In fact, the most common indication is a seller slowing things down overall or delaying timelines. Get ready, not only is seller’s remorse possible, it’s likely to happen.

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When Should You Include Earnouts In Your Offer To Buy A Business?

Earnouts can be a very effective condition to an offer when buying a business however, they don’t apply to every business for sale. So what exactly are earnouts and when should they be used?

An earnout is when a percentage of the purchase price or an agreed upon amount is paid to the seller at some point in the future, depending upon the business achieving certain milestones or conditions. For example, if the sales of the business hit a pre-determined level within an agreed upon time, the seller gets an additional payment. Now, this doesn’t only apply to sales; it could be a wide array of milestones having to be met, so let’s discuss the more common scenarios when earnouts make sense.

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Good Businesses Sell Fast – Buyers Have To Work Quickly

The business for sale market has always had one consistent trend regardless of the overall economy. When a solid business, with provable financials, that can be operated by a wide pool of buyers with a general business background comes up for sale, it doesn’t last long.

Since there’s always a shortage of good businesses for sale and the market is flooded with prospective business buyers, there’s always a pent up demand. As such, you have to put yourself in a position to pounce on these opportunities. In some cases, a buyer may not have the luxury of getting access to all of the information and research they would normally want to review before considering an offer, yet they are concerned about losing the business.

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If Problems Arise During The Due Diligence Period

The title of this post is a bit misleading; it shouldn’t be “if” problems arise but rather “when” they do. I can almost guarantee that you will uncover certain issues during due diligence that were not previously tabled. These can be outright misrepresentations by the seller (i.e. customer contracts that are in jeopardy), or other items you uncover in your research that give you cause for concern about the future viability of the business.

The one thing you do not want to do is run to the seller or broker every time there’s a problem expecting a deal concession. Doing so will cause the seller to not recognize the severity of any single issue and will likely give the impression that the buyer is looking for every excuse to either reduce the price or not do the deal at all.

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Negotiating When Buying A Business For Sale

It’s important to gauge the type of mentality a seller has about negotiating before you start the actual negotiations when buying a business for sale. Similarly, a buyer has to understand their own general strategy regarding negotiations. For a seller, the very nature of their business will dictate how they are going to approach the negotiation stage. For example, in businesses where the seller is actively involved in purchasing inventory for the company, or in ones that compete mainly on price you can almost guarantee that the seller is someone who expects prices and terms to be negotiated back and forth.

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How Long Should The Seller Stay On After You Buy A Business?

Keeping the seller onboard for a reasonable and effective transition period can be the difference between success and failure for a business buyer to be certain the business gets off to a smooth start under their ownership. There are of course potential issues that can arise depending upon how long the former owner stays on, but the question always comes up as to how long they should stay.

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Why Deal Terms Are Usually More Important Than The Purchase Price

When negotiating the purchase price of a business, a buyer would be well advised to avoid getting into the specific deal terms too early in the negotiations. The reason being is that a buyer needs to get the seller fully committed to the deal and mentally spending their proceeds in order to negotiate the best possible deal terms.

But what are the terms separate from the actual sale price you may ask? There are countless aspects to the deal separate from the legal ones with the most important ones being the financing, seller training periods and compensation and earnout structures.

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