Red Flags to Watch Out For in a Purchase Offer

Red Flags to Watch Out For in a Purchase Offer

You’ve listed your business on the open market. An offer comes in. You’re delirious with excitement and you’re ready to sign on the dotted line. But do you know what common red flags to watch out for?

Below are four potential red flags commonly seen in purchase offers. You can read much more about these, learn more, and hear my professional recommendations in Chapter 8 of Walk Away Wealthy—“There’s More to a Deal Than the Sale Price.”

Earn-Outs

Earn-outs are written into a purchase agreement to make the payment of some of the owner’s money dependent on a future company event—for example, 30 percent growth over a year. Since the future of the economy and of your company is uncertain, earn-outs can be risky. It’s smarter to agree to earn-outs as a deal sweetener rather than a “must” for the offer to go through.

Installments

Installments are when you receive the money from your sale on a schedule spread out over several years. Installments can be a great option for the seller, but only accept them if you don’t need your money all at once and if you’re 100 percent confident that the buyer won’t default in the future.

Nondisclosure Agreements

NDAs are designed to protect you—the seller—since chances are you’ll need to reveal most of your trade secrets at some point in sale negotiations. If a prospective buyer is resistant to signing an NDA you should consider ending the deal and by no means should you reveal any confidential information or financials.

Non-compete Agreements

While NCAs are very typical in purchase offers, the severity of them can range quite a lot—and can tell you about a seller. NCAs can be quite strict (for example, disallowing you to ever work in the same industry as the company you just sold) or relatively lenient (for example, only barring you from starting a new business in the same industry). You’ll likely sign one at some point in the sale of your business, but be sure you can live with its consequences. If you can’t handle never working in the same industry, be ready to negotiate this item.

As I write in Walk Away Wealthy, looking beyond the price being offered for your business to the other factors of the offer can make your exit either a dream or a nightmare. The choice is yours.