What’s Good for the Goose… Part 4a – Reaching an Agreement on the Purchase Price

In Part 4 of our series “The Components of a Business Purchase and Sale from the buyer’s and seller’s perspective” we will discuss the various ways of reaching an agreeable price for the purchase and sale of a business.

As used throughout this series, the old adage “What’s good for the goose, is good for the gander” is often not true when discussing the purchase and sale of a business.  A more accurate saying when it comes to buying and selling a business is “What’s good for the buyer is often bad for the seller… and vice versa”.

When the sale of a business is broken down to its most fundamental parts, the sale of a business is made up of the following components:

1. What is being sold (stock sale or asset sale)?
2. How much is being paid?
3. How will the purchase price be paid?
4. Any ancillary agreements or restrictions?

We spent a considerable amount of time discussing the various pros and cons of a stock sale (or a membership interest sale in the case of an LLC) vs an asset sale from both the perspective of the buyer and the seller in previous articles.  In future articles, we will be discussing how the purchase price for the business will be paid to the seller by the buyer, but before even reaching this step, the buyer and seller must agree to the sale price of the business.

It goes without saying that in a business sale, the buyer wants to buy the business for as little as possible while the seller wants to sell the business for as much as possible.  The question remains however, how do a buyer and seller reach an agreeable price.  Because the sale of every business is different, there is no single method that is used for every business sale, but usually most methods of valuing a business fall into 3 general categories:

1. The asset approach
2. The income approach
3. The market approach

Over the next few articles we will be discussing which approach for determining a valuation for the sale of a business is best.  As we have learned in our previous articles, however, what is “best” will often depend on if you are the buyer or the seller in the transaction.  The final valuation is often reached using a combination or hybrid of 2 or even 3 of the approaches cited above.

The Strong Firm has assisted hundreds of buyers and sellers alike not only in figuring out the best approach to utilize to determine the sale price of a business, but we have also assisted those same buyers and sellers in determining the best type of sale structure to utilize as well as deciding the most advantageous way to structure the payment of the purchase price, and we would be glad to do the same for you.