Is 2022 the year to sell? First, let's identify some of the main issues that can hinder a business's ability to sell. In most cases, a business will will fail to sell for one of the following three reasons.
- Unrealistic sales price
- No clarity on the terms of the sale
- Working capital allocation
Sophisticated buyers are negotiation experts and typically realize that time is on their side when negotiating. They aren’t going to waste their time looking at overpriced opportunities. If it is unrealistic for them to make a profit within their desired time frame, most buyers will avoid purchasing a company in haste at a higher price.
When a buyer shows real interest and agrees to a purchase price, time becomes a much bigger factor. After the purchase price is agreed upon, you can proceed to the due diligence process of the sale. In many cases, the information disclosed here can be used to discount or re-negotiate the price of sale.
A financial breakdown, complete with a CIM (Confidential Information Memorandum) and an initial conference call should provide the buyer with enough information to present a binding term sheet that defines the following;
- Purchase price
- Definition of transfer (Asset - Membership - Stock)
- Payment terms (Cash at closing - Seller’s note - Earnout, etc.)
- Asset and liability obligations
- List of tangible and intangible assets and allocation of purchase price
- Disclosure of any legal matters that may impact the deal
The term sheet is for the most part non-binding and should be considered the basis of an agreement. Even though the majority of this agreement is non-binding, the purchase price should still be listed as binding. If the provided financials do not disclose discrepancies or potential issues during due diligence process, the allocation may be negotiated within reason.
Working Capital is the final item to consider before closing, especially if the buyer wants to play hardball at the end of the process. In this situation, the best way to understand Working Capital would be Current Assets - Current Liabilities = Money to the Buyer.
Make sure this is defined in the term sheet to provide clarity. The listed Working Capital should be in line with your average days account receivable, so if it’s 45 days, leave money for a 45-day burn rate max.
