Need advice navigating a price gap with a seller
August 25, 2023
by a searcher from Columbia University - Columbia Business School in Washington, DC, USA
Hi all,
I'm negotiating price with a seller but no surprise, they are insisting on a much higher number. Basically I bid 3.5x but they want close to 5x. Could really use some advice - if you've dealt with this and would be willing to chat please reach out!
Thanks a lot,
David
from University of California, Los Angeles in Tampa, FL, USA
Some advice I've heard that resonates with me is "your price, my terms - or my price, your terms... but not both."
Some things you might consider as part of deal structure to justify / get to a higher valuation:
1) Earnouts - this of course would tie purchase price to actual performance. But if you're going with SBA financing, then earnouts aren't allowed so you probably can't take this route.
2) Seller Financing - you could negotiate a larger chunk of seller financing. If you pay a lower interest rate and stretch the payments over a longer time horizon, then you may find that your debt service is manageable at that valuation. Plus you'll have much more indemnity protection by being able to offset the note if there are unexpected surprises / liabilities post-closing.
3) Clawbacks / Forgivable Seller Note - You can also consider a forgivable seller note. These work even with SBA debt, they just can't be based on future metrics (like an earnout would be). Instead, you just have a metric based on historical performance that gives you some downside protection.
I'm sure others in the community will have better / more insightful recommendations, but thought I'd at least get started with some "deal structuring" tips I'm aware of.
in New Jersey, USA
Earnouts (tying price to future performance), though not viable with SBA financing.
Seller Financing, potentially with low interest or extended terms to manage debt service.
Clawbacks or Forgivable Seller Notes, where parts of the payment are contingent on the company’s performance.
Equity Re-investment from the seller as a way to align incentives.
Deferred Payments, allowing part of the purchase price to be paid over time, to reduce upfront costs.
FOMO strategies and behavioral finance to create urgency.