3 min read

Bridging the Price Gap: Negotiation Tactics for Small Business Transactions

In most transactions, there is a price the seller wants, the price the buyer is willing to pay and the actual market value of the business. These numbers are not always in alignment. If there is a gap, there are several creative ways you can address this.

1. Bump the Lease Rate on Seller Owned Real Estate

If the seller owns the real estate and the buyer will be leasing from them, you can increase the rent above market rent for a specific period of time to make up the difference. If you do use this method, make sure the rent returns to market rent after a specific period of time. For example, if the gap is $120K, you can raise the rent by $1,000/month on a 10-year lease and that will bridge the gap.

2. Hire the Seller as a Consultant

Offering the seller a payout over time in the form of a consulting agreement can be an alternative to adjusting the purchase price. SBA changes in the works will no longer cap this in a 12-month period.

3. Seller Note

Seller financing through a seller note is an appealing option to offset high interest rates, offering the seller a decent return on their investment. Furthermore, structuring the income over time can be advantageous for the seller, as they will be taxed over time rather than all up front.

Some things to keep in mind, seller notes will always be subordinate to primary financing. However, they are typically personally guaranteed to offer some protection to the seller. If the buyer is obtaining SBA financing, a lot of due diligence has been done by the bank to make sure the buyer can make the payments on the 1^st loan and on the seller carry but as with all investments, there is always a risk to the seller in this scenario.

4. Offer an Earnout

Earnouts should be very specific, very simple to calculate, and based on gross revenue. Earnouts are used when the company has a new product that has not been taken to market to prove its value or when there are sporadic revenue trends. There can be good upside for both parties in this scenario, but they can be complicated if not simple and specific. I would never advise using EBITDA or net profit in this calculation, as this can be very different from one owner to the next.

5. Seller Note with the Right to Offset

This is basically a reverse earnout. If the company does not meet certain requirements, such as gross revenue targets, the note is offset by a certain amount.

6. Offer a Premium Interest Rate Above Market on a Seller Note

This method may also be an effective way to bridge the price gap. If you are using SBA financing for the transaction, you will have to stay within their guidelines, and it is important to note that if the business is valued over $300K, it will have to be appraised by an outside appraiser. If you are offering seller financing, you can be very creative with structure, but you will always want to make sure that the business can afford the payments.

The bottom line is there are a lot of creative ways to come to an agreement but on all sides, you want to make sure your price is fair, and the business can support the payout and leave the buyer with a good return on their investment.

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