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When buying or selling a business a lot of time and effort is focused on price. But there is much more to business transactions than negotiating a good price or a good multiple. Terms play an equal, if not greater role in getting a good deal done. There is an old saying in the deal business: “You set the price but I’ll name the terms.” Business transactions are often discussed in terms of multiples. Buyers and sellers rely on multiples because multiples act as a yardstick. For a seller, there can be a certain satisfaction knowing that you negotiated a healthy multiple. For a buyer, a multiple serves as a reality check to ensure that the price paid for a business is similar to other comparable transactions. Multiples serve as goal posts – a frame of reference for both parties. But there are many other important factors to consider when negotiating a business purchase or sale in addition to price. These are four of the more common ones we see when helping clients manage transactions in the collision repair industry. Consideration How will you get paid (or pay) when the transaction is complete? Recently, the majority of transactions in the industry have been all cash, or nearly all cash deals where most of the purchase price is paid at the closing, with a small portion held back in an escrow account for a year or two. But this is a recent phenomenon, and likely not to last forever. Most deals use multiple forms of consideration, the common ones including cash, stock, seller notes and earnouts. But each of these forms of consideration is not equal. Each form of consideration – cash, stock, seller note, and earnout – carries a different level of risk, and thus has a different real value. There is a fundamental valuation method in finance called CAPM (Capital Asset Pricing Model). CAPM effectively states that the greater the uncertainty, the lower the price of an asset (it gets more complex that that – subscribers email me if you want to geek out). In other words, $1 million in the form of earnouts over a year has a real value worth less than $1 million in cash (an earnout is less certain than cash). And the real value of these different types of consideration varies from company to company. Beware – assessing risk and determining what you are actually receiving in a business sale can become very complex very quickly. |
