What is dealmaking or a business deal? It’s a set of terms and conditions which allow a successful ownership transfer between various parties. Dealmaking includes a range of activities both at and away from the negotiating table to bring parties together.
The success of a deal depends not only on price, but also on little things like developing rapport, building trust, moving the conversation forward, and closing the negotiation.
In my 30 years in business, I have learned that the first and foremost thing to do before buying a business is to analyze the market you’re about to enter. While you can’t know every possible result that the other party would want, be sure to understand what your offer or position can do for them.
Apart from setting the right value for the business, there are various components that lead to a successful deal:
- Asset and Liability or Stock Sale: Most of the small businesses which are not publicly traded companies use the asset acquisition method. In this sale, the buyer pays for selected assets and acquires selected liabilities. Anything not acquired by buyer still becomes the responsibility of the seller. On the other hand, by acquiring the stock, all assets and liabilities belong to the buyer after sale and it may include past unresolved issues.
- I purchased a UPS Store some time ago. The seller was behind on rent payments, owed money to UPS and some other vendors. I purchased the selected assets and liabilities. Most of the money paid by me was distributed to various debtors of the UPS Store by the escrow company. Instead of getting any money, the seller paid few hundred dollars to close the deal.
- Very rarely, a business is sold as an all-cash deal. Seller arranges to finance the complete transaction which includes:
- Down Payment
- Bank Loans
- Seller Financing
- There could be various other incentives for the seller if the buyer reaches its financial or any other goals as part of the deal.
- The most important thing is being creative while balancing goals of seller and buyer and using various methods of financing available.
Over the years, I have been involved in buying and selling of more than twenty businesses. Here are some of the deal structures which helped me close the deal.
- The UPS Store only gives financing to a 2nd Store only after the first store has been in business for 1 year. Each member of my family who wanted to open a store did a joint venture with somebody who owned the store for one year. After a few years, they separated the joint venture but financing stayed in place.
- In one of the Asset and Liability sale, I paid seller only $79K after accounting for all the liabilities. It included a liability of $200K to a public company. After a couple of years, I made deal with this public company. The public company had already written off that debt and my current business had an ongoing relationship with this company. I ended up making $121K in this deal instead of paying.
- I have also used a soft selling technique where the buyer pays a lump sum to take over the business and full sale happens at a later date. It allows the buyer to make some money before purchasing the business and it improves the buyer’s cash flow.