Buying a Business – Tactics to Lower Purchase Prices
Buying a Business — Buyer Tactics to Lower Purchase Prices
It’s a dynamic that won’t surprise anyone – when buying a business, the Buyer is going to do everything in their power to pay the lowest amount possible while the Seller will try to push it higher. For this article, we’re going to focus on the strategies that Buyers use to lower the purchase price of a business. But beware – Sellers have their own strategies, which you can read about here, too!
Delaying or Substituting Cash Payments
The best option for the Seller usually involves stipulating that payment be made in its entirety in cash the moment that the deal is set in stone. This is because it gives the Seller the security and flexibility, as well as more control. But the Buyer will oppose cash for the same reasons.
One way for the Buyer to dilute the cash payment is to have some of it placed into an escrow for any indemnification claims that might pop up unexpectedly. Another method is to ask the Seller to accept a promissory note as a substitution for part of the purchase price. Like any other IOU, this lets the Buyer put off paying in full at the outset. Similarly, a buyer may propose future cash payments known as “earn-outs” based on the business’s performance after the acquisition.
Offering to pay in stock instead of cash is another tactic favored by Buyers. This is more of a gamble, however, due to the chaotic nature of stock prices.
Investigations for Liabilities (AKA Due Diligence)
Due diligence investigations are standard procedure for the vast majority of acquisitions. In this process, the Buyer reviews the Seller’s documents, financials, equipment, and any other factors or liabilities that might impact the purchase price. If any existing or potential liability is found by the Buyer, they will likely use this to argue for a lower purchase price or stricter indemnification provisions.
Calling Out Breaches of Representations, Warranties, or Pre-Closing Covenants
In layperson’s terms, representations and warranties are statements in the purchase agreement describing the Seller’s business. The Seller should go to great lengths to ensure that these statements are accurate and comprehensive. Misleading or inaccurate statements give the Buyer cause for reimbursement through the indemnities. If there are any pre-closing covenants, then those can lead to the Buyer demanding compensation, if not an end to the deal altogether.
Asking for Indemnification
We’ve talked about it a little bit above, but “indemnification” refers to the method in which the Buyer is compensated for any losses related to liabilities that the Seller had, intentionally or by mistake, failed to disclose. This applies to “misleading” statements, too. This is a situation where having legal counsel will work to your advantage in a major way. They can help you along every step of buying a business, especially with drafting an agreement that the Buyer can’t use against you.
Feigning Outrage Over Reasonable Delays
Don’t let anyone tell you otherwise – the target closing date and the actual closing date are rarely the same day. Life is full of all sorts of delays, and buying a business is no exception. But that doesn’t mean that some Buyers won’t use this for their own gain. They might accuse the Seller of working too slowly and use this played-up impatience to lobby for a lower purchase price.
Capitalizing on Surprises
Hardly anyone likes last-minute surprises, and however much they might upset the Buyer, the Seller is in the worse position. This is another reason why it’s so important to be upfront and thorough in your representations. Buying a business is stressful enough. Don’t give the Buyer a chance to lowball you in the final stretch!
Looking to buy a business, start a business, or grow your current business? Contact FL Patel Law today by visiting our website or calling 727-279-5037.