How do I negotiate a sale of business agreement?

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Table of Contents

• Do you know what you’re actually buying?
• Find out why the seller is selling
• Make sure Business Goodwill is included in the agreement
• Competition Covenant
• Get the pre-sale conditions right
• Don’t rush it!
• Do your homework
• And Finally – Negotiate

So you’ve finally decided to make the big move!  Buying a business is exciting and risky.  You don’t want your big chance to go pear-shaped because you made a bad deal. Negotiating the terms in a sale of business agreement is key to ensuring the success of your new venture. In order to help you get a handle on the issues you should be looking out for, we’ve put together a short checklist.

Do you know what you’re actually buying?

Understanding what you are buying is extremely important.  In some business sales you are buying a bundle of assets and in others you are buying the business itself.  Both types of sale have important liability and tax implications. If you’re buying the business itself, as a going concern, then you are effectively the business name, licences, patents, trademarks, stock and equipment. You will also want to have the ability to use the premises from which the business operates. Determining the value of all of these assets will help you determine an accurate purchase price.

Find out why the seller is selling

You should do your best to find out why the seller is actually selling their business.  Don’t just ask them, but also investigate for yourself.  This might work out to be their Achilles heel and may enable you to lower the price or work out whether it is worthwhile you taking it over.

Make sure Business Goodwill is included in the agreement

What is ‘business goodwill’?  Goodwill is really the names of customers, trading partners, products and services which the business uses.  You should ensure these are being transferred to you as part of the agreement and work out what this information might actually be worth.

Competition Covenant

A sale of business agreement should prevent the seller from competing with the buyer by preventing the seller from competing with the business after the sale is complete in a specified area (e.g. within 5km of the business premises) and for a specified period of time (e.g. 3 years).  The area and time should be reasonable having regard to the circumstances of the business.

Get the pre-sale conditions right

A good sale of business agreement will cover employee transfers, banking approvals, debts, third party consents and any relevant regulatory red-tape.

Don’t rush it!

Buying a new business can be very exciting and you just want to get into it.  You should, however, give yourself plenty of time to negotiate an agreement which can maximise your money-making potential in the long run.  Ensure it is the right business for you.

Do your homework

Preparation is vital to a good negotiation, so do your homework before you finally decide on anything. Make sure you fully understand the value of the business.  There are a number of key financials you will need to review and understand in order to ascertain the correct value of the business; this includes the balance sheet, profit & loss statement, cash flow statement, asset valuation and liabilities.

And Finally – Negotiate

Be assertive.  Don’t be aggressive or confrontational, and obviously don’t be passive either.  Be calm, stick to the facts and try to find the mutual underlying interest at all times. Keep the emotion out of it – be honest, flexible and open minded. Be prepared to compromise and problem-solve.  Negotiation is not necessarily a zero-sum game, so aim for a win-win outcome. Remember to take time out to consider and reconsider if you this is what you need. Speak to a business solicitor to get expert advice!