The first thing to appreciate is that it is easier to fall out with sellers than to keep them onside. You will get a better buy if you can keep the seller onside at least for as long as possible. Once you fall out, mending fences is impossible.
Sellers usually have a sale figure in mind. Agreeing a sale price at the outset slightly above this figure gives the seller a feel-good sensation and makes him/her think that he/she has a margin to play with. It also means he/she is unlikely to start talks with other buyers.
You won’t. Once the nitty gritty negotiations start, you will ask for guarantees as to the business’ turnover and profitability for say the next 12 months and ask for money to be retained. If the business turns out to be a star buy and performs above your expectations, the full stated price is probably acceptable. If it does not, you will have held money back, which the business sale agreement will enable you to deduct from the purchase price.
As much money as possible – for as long as possible. The agreement can provide for money to be released in slices. Your seller is unlikely to agree to more than 50%.
Ideally you, although the seller might want money held by a solicitor in an escrow account.
See if he/she does. If he/she comes back to you it means he/she has not been able to. You can then push him further. Remember, they will be thinking about your headline figure, which they probably cannot get elsewhere. You can also tell the seller that if the business does better than they anticipate, you will pay more based on performance. This way you can tell them that they have an upside, as well as a downside, and an interest in making the transfer work.
When the seller goes very quiet and stops coming back to you. It is better for you if they respond angrily at this stage, because it’s a sign that they still might eventually sell to you. If they do not respond, they have either written you off or they are talking to another buyer. Most deals reach an “angry phase”, after which the deal happens or does not. The skill is to manage how and when the seller gets to the angry moment and how this moment is managed, so you stay in control.
The seller and any business transfer agent will be keen to get “Heads of Agreement”, which outline the deal. This will be what the lawyers drawing up the sale agreement will work from. Tactically, if you want to keep matters as fluid as possible, you should either delay agreeing the Heads of Agreement or ensure that they are drafted in a form that is flexible. This way, it will be impossible for the seller to refer to these as “agreed” when the goalposts start to move.
Don’t be shy – it’s your money you are spending. Get as much information from the seller as you can. Don’t rely on solicitors or accountants to do this. They can help, but ultimately it’s your call. If there are things that are unsatisfactory, you will want money held back or deducted from the price.
They will be thinking about their commission and will therefore be keen for the deal to happen. If you knock some money off, it won’t have a big impact on what they get, so they will be on your side. If the business doesn’t sell, they will get nothing.
Most are useless at negotiations. You are best not involving them at this stage. By definition, if they were good at negotiating they would be successful businessmen making much more money than solicitors.
It’s a crucial consideration. Sadly, there is always a third party trying to get money – namely HMRC, which people often forget about. At the outset, Get to grips with tax both from your perspective and your seller’s. It could make a big difference to you. Your seller may have tax angles and you need to factor this in. If you can do something that helps them save tax, use this as a negotiating lever. Do not lose the deal because you are insensitive to the seller’s tax position. Finding a way to pay HMRC the least tax is good news for you both.
Blog provided by David Anderson (solicitor advocate and chartered tax adviser) and Alan Massenhove (commercial solicitor) at Sykes Anderson LLP. Please note that commercial and tax law are complex subjects and you should not rely on this article without professional advice on the facts of your case.