by Scott Benfield and Jane Baynard

The process by which you are selling your wholesale distribution has taken some very interesting twists and turns. From valuing and pricing your business to deciding on the proper technique in which to structure the transaction, you and your team have worked in conjunction with the potential buyer(s) to cooperatively examine each alternative and devise the proper technique in which to handle each phase in the process.

As this process continues, you find yourself in an unfamiliar and sometimes rather uncomfortable position: the negotiation table.

The art of negotiation plays a pivotal role in buying or selling a business. Differences of opinion are almost assuredly going to occur and only the most pragmatic negotiators can find creative solutions for these differences.

By developing a working strategy, both you and the prospective buyer can maintain an open line of communication that will enable you both to know each other's position. It is imperative that the parties are aware of the issues that are important to each other. This allows each party to assume a non-adversarial stance in assurance that the business will change hands smoothly.

Many factors have to be discussed and finalized before a closing can be accomplished. These include the needs, terms and price of the transaction, as outlined by both parties. Sellers naturally have the upper hand when negotiating these particulars since they best know the business. The buyer can minimize this by learning as much about the business as possible, prior to the start of negotiations. This eliminates much of the difficulty of reaching agreement and keeps the parties from wasting time.

By understanding each step in the negotiation process and being fully aware of all the implications entailed in this process, each of the parties involved can enjoy a smooth transition of ownership.

Needs
At the outset, it's important for you to sit down and do some serious thinking about what, exactly, you want from the sale of your business. In order to determine your personal needs, ask yourself a few questions:
• Is it important that you or a family member remain with the business?
• Are you looking for a buyer who will continue your business traditions?
• Do you want certain tax advantages in exchange for a lower purchase price?
• Is there some minimum price that you must get in order to be happy?

It is extremely important for you to be realistic and honest with yourself. Outline the exact needs that have to be met in this transaction. Although, as with most things in life, you will have to make some compromises. Rarely does a sale completely meet all of the seller's needs and objectives — or all of the buyer's. 

For example, if you insist on getting all the money at closing, you will almost surely have to compromise on price. On the other hand, if you're willing to finance part of the deal, you may get a higher offer. The point is, the more flexible you can be on your needs and terms, the closer you'll get to realizing the top-dollar value of the business.

Terms
Most business buyers and sellers are under the impression that price is the most important aspect that needs to be negotiated within a transaction. Think Again! Terms drive price, and you should arrive at a general agreement with the buyer about the major terms before you start talking dollars. Some of the terms you should be considering are:
• What, exactly, are you selling?
• To what extent will you remain involved in the company, after the sale?
• How much will tax considerations affect your net proceeds from the sale?

By answering these questions objectively, you can devise a list of your absolute requirements as part of your selling memorandum. This is so those buyers who can't meet your minimum terms won't use up your precious time by inquiring about the sale of your distributor.

Aside from terms relating to what you are selling with the business, terms relating to payment are the most important, and need to be generally agreed upon before the letter of intent is signed. Needless to say, payment terms can have a big impact on the price you'll accept for your business, as well as on the price the buyer is able and willing to pay. Some of the payment terms that you may want to consider are:
• The down payment
• Seller financing
• Escrow arrangements

Depending upon the size, type and financial condition of your business, these questions can have a sizable impact on potential stipulations faced by you, the seller, in the future.

Price
Once you've gotten a fix on what the major terms of your deal are going to be, you can begin to negotiate on what is arguably the most important aspect of the sale of your business: the price. Price negotiations are considered the central bargaining issue in the buy-sell transaction. Most often when selling a business, it is necessary to make the first price move because you will have to give a ballpark asking price to a prospective buyer or your business broker. This initial asking price can be used in sales advertisements and can be included in your selling memorandum.

Obviously, the buyer knows that your asking price is not the least you will settle for. What he doesn’t know is how low you are willing to go. If your buyer knows that your asking price is based on a formal appraisal using recognized valuation formulas, he or she may take your asking price more seriously, and make an offer that is fairly close (i.e., within 15 percent or so) to it. 

However, don't be shocked if you get low-ball offers at or around 50 percent of your asking price, or often times less. There are a lot of bottom-feeders out there looking to buy businesses from desperate owners, but there are also legitimate buyers who just want to test your stamina by starting with a small bid. You should always respond to each offer on its own merits, and don't allow yourself to feel insulted or angry at an offer that you think is far too low.

Occasionally buyers will be presented with an offer that exceeds his or her asking price. This should not result in an automatic acceptance of the offer. Buyers will expect you to bargain hard on this issue. If you give in too soon, they will think something is wrong with the business, or with you (which in turn reflects on your business). 

One suggestion to keep in mind is that you should not get too hung up on any particular price. If you feel that the buyer won't budge, you can go back and change some of the terms you've tentatively agreed on, to make them more favorable to you.

Maintaining "deal-momentum"
Maintaining momentum within the transaction for the sale of your wholesale distributor involves a series of documents and steps that need to be devised and completed. These documents and steps are necessary in this process in order to assure that the deal is being handled in a legal manner and also to limit the amount of liability placed on you, the buyer. The following components are the primary means by which deal momentum is achieved.

Letter of Intent - Once you have a general agreement with the buyer as to the price and terms of the sale of your business, the buyer usually drafts and signs a non-binding letter of intent. The letter of intent lays out the general terms of the deal, and if signed by the seller, indicates that both parties intend to move forward in completing the transaction. Generally, at the time the buyer submits the letter he or she will also make a deposit on the purchase price.

Remember that the letter of intent is nonbinding. This allows negotiations to be broken off by either party at any time. Although, there is one part of the letter of intent that should be binding on the purchaser, and that is the section in which the buyer promises to keep confidential the fact that negotiations are proceeding, and also promises not to disclose any information learned during the investigation or negotiations. This provides you with some protection if the deal falls through. Though this may be true, it is still a good idea to keep the most sensitive trade secrets or other information to yourself until you are sure that the buyer will sign the contract.

Due diligence - Generally, after a buyer signs a letter of intent to purchase a business and the seller accepts the letter, the buyer will have a specified period of time in which to conduct a due diligence investigation of the seller and the company. This is done for the purpose of checking to make certain there are no hidden pitfalls within the business. During this period, your buyer will investigate and should have access to your financial and other records, employees and other documents that are pertinent to the functioning of the business.

An experienced buyer will also want to take a look at your facilities, and spend some time "in the trenches" with you and/or your employees as you go about your business. It is suggested that you accommodate this request, even if it will cause some disruption of your normal operations. Buyers will be most suspicious if they think you are hiding something. They tend to be more concerned about what they don't know, than they are concerned about minor or even major problems that might turn up in an investigation. If you know that certain problems exist, you're much better off disclosing them and talking about possible solutions, rather than shoving them under the rug.

While you and your business are under the microscope of the prospective buyer of your business, you should do a due diligence investigation of your own. Researching the buyer's credit record, management experience, reputation and future plans for your business are a few areas that need to be exposed. The purpose of this is to assure that the business will be properly managed after the sale, which will be very important if you plan to continue employment or have a consulting agreement with buyer after the sale. This also excludes you from any liability in which you may have been subjected to in the case of fraudulent misrepresentation on the part of the new owner after the sale.

Business purchase agreement - The purchase agreement for your business is one of the most important legal documents you'll ever sign. After all, many years of hard work will culminate in this single transaction, by which you'll put a dollar sign on the value of your entire operation. You don't want to have problems collecting the money due you or to have legal problems haunting you into the future, and a carefully constructed purchase agreement can be your best insurance policy for preventing such catastrophes. This agreement is constructed primarily by the seller's lawyer. However, the lawyers from both sides of the bargaining table most often work concurrently when completing this agreement. This is in order to insure that both parties are represented equitably in reference to clauses and warranties contained in the contract.

The purchase agreement is likely to be a lengthy, complicated document. You should go through it carefully with your attorney and business advisor to make sure that you understand the implications of what is embodied in the contract.

Walk-away
As the negotiation phase of your transaction concludes, you the seller, need to keep in mind the terms and goals that you determined at the beginning of the transaction process. It is easy to forget your level of terms and needs due to the transaction being lengthy and laborious.

Before the final negotiations begin, it is advisable for you to create a list of goals and objectives you wish to realize at the end of negotiations. This list, which will likely be provided by the buyer as well, will provide you with a guide in which to follow when negotiating. This list will also allow you to focus on specifics during negotiations and as an armor against any ploy by the buyer to take the focus off your own goals.

Another tool that can be utilized in the negotiation process is the walk-away. The minute you feel uncomfortable because the other side has made a demand you can’t live with but that you feel you can’t say no to, take a break. This will give you valuable time in order to confer with your colleagues and give yourself some time to think it over.

You often get caught up or agree to terms because you can’t figure out where the exit is. The exit is always right behind you — use it!  Many experts believe that using the walk-away to your advantage is the key to negotiating acquisitions. If you set parameters of what you’re going to accept and then walk away because those parameters are not met, chances are that the other side will call you back.

In summary, know your limits in price and terms and stick to them. If the transaction does not make sense, it is never too late to walk away.

The negotiation for the sale of your business may be the most significant process of your life. Assuring that your needs are met and that the price and terms of the deal are equitable takes a considerable amount of preparation and planning. In order to maximize these claims, make sure that the proper amount of research and investigation has been done pertaining to both the buyer and the legal consequences of the deal. This in order to prevent any adversity with the transaction and to insure that you are walking away from the deal feeling like the sale of your business was as successful as the operation of the business itself.

To aid you in this cumbersome task, we have developed a worksheet that will help you to focus the priorities and goals of your business sale. Just send us an e-mail request and we will forward it straightaway. In the next installment of our series, we will focus on the alternatives pertinent to the business sale.

Jane E. Baynard is an investment banker and Scott Benfield is a consultant for distribution. They have co-authored three books on wholesale distribution, including Pricing Management: Capturing Value for Distributors, and can be reached at their respective e-mail addresses: Jane E. Baynard at jb@baymengroup.com and Scott Benfield at bnfldgp@aol.com. Research analyst for this article was Jon Robinson.