Florida Acquisitions — Buyer Tactics to Lower Purchase Prices
March 14, 2019
Florida Acquisitions – Buyer Tactics to Lower Purchase Prices
It’s a dynamic that won’t surprise anyone – during any sort of acquisition, the Buyer is going to do everything in their power to pay the lowest amount possible while the Seller will understandably be pushing for the highest price that they can get away with. 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, 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 inherently chaotic nature of stock prices.
Investigating 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 your Purchase Agreement has any pre-closing covenants, then those too 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 to put it simply, “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 put together a bulletproof, accurate agreement that the Buyer won’t be able to 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, if ever, the same day. Life is full of all sorts of delays, and acquisitions are 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 Eleventh-Hour Surprises
Hardly anyone likes last-minute surprises, and however much an eleventh-hour bombshell might upset the Buyer, the Seller is the one in the worse position. This is another reason why it’s so important to be upfront and thorough in your representations. Don’t give the Buyer an opening to lowball you in the final stretch!
Looking to start a business or grow your current business? Contact FL Patel Law today by visiting our website, www.FLPatelLaw.com, or calling 727-279-5037.
Tyler Thompson is a second generation St. Petersburgian with a passion for reading and writing. In 2018 he finally made his way to FL Patel Law PLLC where he has found a home for himself as Project Manager. He is an unapologetic dog person who enjoys spending what free time he has with his friends and family.
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