Negotiating Price And Terms When Buying A Business

Price Versus Structure

Sellers anchor on the headline price. Buyers live with the cash they bring, the debt they carry and the risk they take on. A good negotiation trades between the two so both sides get what matters most to them.

The structure items that move value in an SBA deal:

• The seller note: how much, and whether it is on full standby or paid alongside the SBA loan
• What is included: inventory, equipment, vehicles, receivables and the building
• The working capital peg and true-up
• The seller's transition: how long, and how the seller is paid as a consultant
• The timeline and the conditions to closing

A seller who will not move on price will often move on these. And sometimes a higher price with better structure is the better deal for you.

Two Offers, Side By Side

Say an insurance agency is listed at $2,500,000. You could offer less in all cash, or full price with the seller carrying a small note on full standby. In both offers, $100,000 of working capital and closing costs are financed in the project.

Offer B gives the seller the full asking price and more cash at closing than Offer A, plus the standby note and its accrued interest later. You bring $115,000 less to the table.

The trade-off: your SBA loan is $135,000 larger, so the business has to carry higher payments at a DSCR of at least 1.25, and the lender's valuation has to support $2,500,000. If both hold, Offer B is often the easier yes for the seller and the lighter lift for you. Read seller notes on full standby for the rules.

Use The Valuation As Your Neutral Referee

Every SBA acquisition needs an independent business valuation, ordered by the lender. If you agree to pay more than it supports, SBA requires the difference to come from equity. That rule gives you a neutral reason to renegotiate: it is not you saying the business is worth less, it is the lender's appraiser.

When the valuation comes in short, you have three paths:

1. Lower the price to the valuation.
2. Have the seller carry the gap on full standby. SBA allows extra limited-source funds above the usual half of the Down Payment when the price exceeds the value supported by the valuation and QoE, as long as they are on full standby.
3. Bring more cash to cover the gap yourself.

Write a financing contingency, including a supporting valuation, into your letter of intent so you keep these options. Our guide to SBA business valuation requirements explains the process.

Let Due Diligence Do The Talking

Price renegotiation after an LOI, sometimes called a re-trade, damages trust when it looks like a tactic. It is fair when it is grounded in findings. The strongest findings come from documents the lender also sees:

• Tax returns and IRS transcripts. The lender verifies the seller's earnings against them. If the returns show less profit than the listing, the price was built on the wrong number.
• The Quality of Earnings report. Required when the Business Purchase Price is $3,000,000 or more. It documents every add-back, tests revenue quality and flags customer concentration. The lender must use its earnings to test cash flow, and if coverage does not support the price and debt, the loan is reduced.
• Customer and employee facts. A top customer leaving or a key technician planning to quit changes what the business is worth.

When you bring a finding to the seller, bring the document and the math. See the Quality of Earnings report guide and why business acquisitions fall apart.

Negotiate The Seller Note Terms

If the seller carries a note, the terms are negotiable too:

• Full standby or not. Only full standby, with no payments of principal or interest for the life of the SBA loan, counts toward your Down Payment and stays out of the DSCR. Partial standby, such as 24 months, is a payment holiday, not a Down Payment source.
• Interest accrual. A standby note can accrue interest during standby, paid after the SBA loan is paid off. Accrued interest is the main way to compensate the seller for waiting.
• A second note. Some deals pair a standby note with a smaller note repaid alongside the SBA loan. Its payments count in the cash flow test, and the SBA loan plus that note cannot exceed the valuation.

Have your attorney and CPA set the note's terms. Here are a few of the structures our clients have closed:

Real loans we placed. Borrower and lender names are kept private. See all closed deals.

For the full menu, read seller financing with an SBA loan.

Working Capital And What Comes With The Business

Agree on what the business has in the tank at closing. Two items move real money:

• Inventory. Is a normal level included in the price, or paid separately at cost after a count?
• Working capital peg. A target level of current assets less current liabilities, with a true-up after closing. SBA treats a true-up in the purchase agreement as a fix for missing working capital, not a rebate, so any cash you get back can stay in the business.

A seller who empties receivables before closing leaves you funding payroll from day one. A peg protects you. See working capital and lines of credit at closing.

The Seller's Transition

In an Initial Acquisition, the seller cannot stay as an owner, officer, director or employee. The business can contract with the seller as a consultant for up to 24 months in total, including extensions.

What to negotiate:

• Length: often a few months of full-time help, then part-time support
• Pay: a consulting fee is a business expense, so the lender counts it in cash flow
• Scope: introductions to top customers, vendor relationships, training on estimating or operations
• A non-compete: so the seller does not open across the street

Do not move part of the price into an oversized consulting fee. Lenders read the agreements, and a fee that looks like disguised purchase price will draw questions. See seller transition after the sale.

Know What You Cannot Trade

Some asks are off the table with SBA financing, so do not spend negotiating capital on them:

• Earnouts. SBA prohibits seller earnouts. A buyer rebate tied to performance is allowed, but the money goes to pay down the SBA loan. See earnouts and SBA loans.
• Less than 10% down. On an Initial Acquisition, the lender cannot reduce the 10% Down Payment.
• The seller keeping a slice. The seller cannot retain ownership in an Initial Acquisition.

Tax items, like how the price is allocated across assets, are negotiable and matter to both sides. This is general information, not tax or legal advice, so work through them with a CPA and an attorney. Our tax basics guide is a starting point.

Before you make an offer, get a pre-qualification letter that reflects your structure, and read more about SBA business acquisition loans.