The Parties’ Conflicting Objectives

The seller and buyer have opposite objectives when negotiating an offer or letter of intent.

Following are the seller’s objectives:

  • Maximize the purchase price.
  • Receive maximum cash down at closing.
  • Pay minimum taxes.
  • Reduce contingent payments, such as earnouts and escrows.
  • Reduce the scope and breadth of reps and warranties.
  • Reduce the strength of indemnification.

Following are the buyer’s objectives:

  • Minimize the purchase price.
  • Put minimum cash down at closing.
  • Maximize the tax-deductibility of assets acquired by increasing the tax basis in these assets.
  • Increase earnouts and escrows.
  • Increase the scope and breadth of reps and warranties.
  • Increase the strength of indemnification.

All of these components should be taken into consideration on a collective basis during negotiations. When negotiating, concessions should never be made in isolation. 

For example, if the buyer proposes a lower purchase price, the seller can concede but may request more cash down at closing or reduce the size of the earnout. Or, if the seller insists on providing minimal representations to a buyer, the buyer may concede but may tighten up other elements of the transaction structure, such as escrow, knowledge qualifiers, or thresholds.

As the seller, the more assurances you are willing to provide to the buyer, the lower the risk for the buyer and the higher the purchase price the buyer can potentially afford to pay given the amount of risk they’re assuming. Risk and return are directly related. The higher the risk, the lower the return – and vice versa. By lowering the risk for the buyer, you can potentially realize a higher purchase price. 

The following are the most fiercely debated elements of the transaction:

  • Price and Terms
    • Purchase price
    • Terms of the seller note
    • Post-closing purchase price adjustments, such as working capital adjustment
    • Escrow: size and length
    • Contingent payments, such as earnouts and escrows
    • Specific terms of employment and consulting agreements
  • Deal Structure
    • Allocation of purchase price, which affects the tax implications of the transaction
  • Protective Mechanisms
    • Reps and warranties, including survival period, knowledge, and materiality qualifiers
    • Indemnification, such as caps, baskets, and survival period
  • Miscellaneous
    • Conditions to closing, including material adverse change (MAC)
The higher the risk, the lower the return – and vice versa. By lowering the risk for the buyer, you can potentially realize a higher purchase price.

Here is a summary of the buyer’s and seller’s objectives. Not unsurprisingly, the buyer and seller usually have opposite motives.

Buyer’s and Seller’s Objectives
Key TermSellerBuyer
Purchase PriceMaximizeMinimize
Cash DownMaximizeMinimize
TaxesPay Minimum TaxesMaximize Tax-Deductibility
Earnouts MinimizeMaximize
Reps and WarrantiesMinimize ScopeMaximize Scope
IndemnificationMinimize Caps and Survival PeriodsMaximize Caps and Survival Periods
Information Sources