What are common items to negotiate in a business sale?

Negotiating a business sale involves addressing various elements that impact the transaction’s value, structure, and post-sale outcomes. These elements go beyond the purchase price and encompass financial, operational, legal, and transitional aspects of the deal. Here are the most common items negotiated in a business sale:

The purchase price is central to the negotiation. Both parties must agree on the value of the business, which is typically determined through valuation methods such as earnings multiples, asset valuation, or discounted cash flow analysis. The buyer may negotiate the price based on factors like financial performance, market conditions, or the inclusion of specific assets or liabilities.

The deal structure—whether it is an asset sale or a stock sale—is another critical point of negotiation. In an asset sale, the buyer purchases specific assets and liabilities, while in a stock sale, the buyer acquires the entire business entity, including all its assets and liabilities. Each structure has tax and legal implications for both parties, and the decision often depends on the buyer’s goals and the seller’s preferences.

The inclusion of inventory is a common negotiation point. The buyer and seller must decide whether inventory is part of the sale and, if so, agree on its valuation. For instance, the inventory may be valued at cost, market value, or a discounted rate, depending on its condition and relevance to the buyer’s plans.

The treatment of accounts receivable and payable often arises during negotiations. The buyer and seller must determine whether these will transfer as part of the deal or remain with the seller. If included, the parties must agree on the valuation and terms for collecting outstanding receivables or settling payables.

Employee retention and responsibilities post-sale are frequently negotiated, especially if the business depends on key personnel. The buyer may require assurances that critical employees will stay on after the sale, which could involve offering retention bonuses or new employment agreements. Alternatively, the seller may negotiate terms to ensure employees are treated fairly post-sale.

Non-compete agreements are commonly included to prevent the seller from starting a competing business or working with competitors in the same industry for a specified period and within a certain geographic area. The terms of the non-compete, such as duration and scope, are often subject to negotiation.

Transition support is another critical element, particularly for businesses where the seller has been deeply involved in operations. The buyer may request the seller’s assistance during a transition period to ensure continuity. This support could include training, introducing the buyer to key customers or suppliers, or consulting for a specified time.

The allocation of liabilities is often debated, as buyers may wish to exclude certain liabilities from the transaction, such as outstanding debts, pending legal claims, or unresolved tax obligations. The parties must clearly define which liabilities will transfer with the business and which will remain with the seller.

Real estate and leases associated with the business, such as office spaces or production facilities, are important negotiation points. The buyer may negotiate to acquire real estate as part of the deal or request favorable lease terms if the property is rented. The transfer or renegotiation of leases requires coordination with landlords and compliance with lease agreements.

Intellectual property (IP), including trademarks, patents, copyrights, or proprietary processes, is critical for many businesses. Buyers often negotiate the inclusion and valuation of IP assets, ensuring they have clear ownership and rights post-sale.

Seller financing can be negotiated if the buyer cannot pay the full purchase price upfront. In such cases, the seller agrees to finance part of the sale, with the buyer repaying the amount over time under agreed terms. This arrangement benefits the buyer by reducing upfront costs and can provide the seller with additional income through interest.

Tax considerations also play a role in negotiations, as the structure of the sale can significantly impact the tax obligations of both parties. For instance, buyers may seek to structure the deal in a way that maximizes tax deductions, while sellers may aim to minimize capital gains taxes.

The resolution of contingencies is often included in the negotiations. Contingencies might involve conditions that must be met before the sale is finalized, such as securing financing, obtaining regulatory approvals, or completing due diligence.

The timeline of the transaction is also discussed, covering when the sale will close, when payments will be made, and how long any transition or earn-out periods will last. Both parties aim to establish realistic and mutually acceptable deadlines.

Negotiating these items requires clear communication, thorough due diligence, and an understanding of each party’s priorities. Consulting with legal, financial, and business advisors ensures that the terms of the agreement are fair, comprehensive, and legally binding, paving the way for a successful transaction.

A notable example of a poorly negotiated business sale is the acquisition of Yahoo’s core internet business by Verizon Communications in 2017. This high-profile transaction highlights how missteps in negotiation, transparency, and due diligence can lead to significant problems, even in large corporate deals. Verizon initially agreed to purchase Yahoo’s core assets, which included its digital advertising, email, and media operations, for $4.8 billion. However, Yahoo failed to disclose two massive data breaches that had occurred years earlier, affecting over three billion user accounts. These breaches represented the largest data security incidents in history and had a profound impact on the transaction.

When Verizon discovered the extent of the breaches after the sale agreement had been announced, it renegotiated the terms of the deal, ultimately reducing the purchase price by $350 million. Beyond the financial loss, Yahoo’s reputation suffered severe damage, and the disclosure of the breaches raised serious questions about its transparency and corporate governance. This situation illustrates how the failure to address critical aspects of a business sale can lead to disastrous outcomes for both parties.

Yahoo’s failure to disclose the data breaches before the deal was finalized reflected a lack of transparency, which eroded trust and led to significant financial penalties and reputational harm. In addition to the financial renegotiation, Yahoo’s standing as a reliable and competent company was severely undermined. Verizon also faced challenges, as its due diligence process had not uncovered the breaches in time to account for them in the original agreement. This oversight underscores the importance of comprehensive due diligence on both tangible and intangible aspects of a business, including cybersecurity, intellectual property, and existing liabilities.

The deal also exposed weaknesses in the structure of the agreement. It did not adequately address potential contingencies related to undisclosed risks, leaving Verizon exposed to financial and operational consequences. The renegotiation of terms, the reduced purchase price, and the lingering fallout from the data breaches demonstrated how both buyers and sellers must prioritize transparency and risk assessment during negotiations to avoid similar pitfalls.

For small business transactions, the lessons from this case are highly relevant. Failing to disclose critical liabilities or risks, conducting inadequate due diligence, or neglecting to establish clear terms for handling potential issues can derail deals, lead to costly disputes, or diminish the value of the transaction. In Yahoo’s case, these failures resulted in financial loss, reputational damage, and a legacy of mismanagement that overshadowed the sale. Buyers and sellers alike must ensure thorough preparation, clear communication, and comprehensive evaluations to achieve successful outcomes in any business sale.