Speaking Transaction Language
Hey there deal makers,
Welcome to the Better Business Brief, where I share takeaways from:
- running a business I’m building to sell for millions
- my consulting with business owners building to sell for millions
- tips and tricks you can use to do the same
I spend much of my time learning about, helping with, speaking about, and getting involved with selling and buying businesses. Because of this, I’ve learned a lesser known but very valuable language - I call it Transaction Language. This is the language of making deals and closing a purchase or transaction of a business.
So today, in less than 5 minutes, I’ll give you:
🗣️ 5 Pieces of Transaction Language to Know
🧠 What Each of Them Means
🧐 How to Apply Each of Them in Deals
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The more you speak the language of doing deals, the better you will fare when it comes to doing them. If you speak this language, whoever is on the other side of the transaction will see that you are a player of the game and will give you more respect in the transaction process. This may even lead to a better deal on your part, or at least avoiding a bad one. It also just helps you navigate the process more smoothly, and with a clearer head, knowing what could be coming next. Here's the first:
1. LOI (Letter of Intent): |
When you’ve decided that hypothetically, you’d like to buy a business, you draft up and send an LOI. This is a non-binding agreement that outlines the key terms and conditions of a proposed business transaction. It’s basically a roadmap for the deal. For all intents and purposes, it’s the same thing you’d sign when the business sale is happening, except it doesn’t actually finalize the sale. It’s like the buyer is saying “I agree that I want to buy your business like this” and the seller is saying “I agree that you could buy my business like this” when signed. You should use an LOI first, before ever doing a full business sale agreement to make sure both sides agree on the main aspects of the deal before investing time and money into due diligence. It clarifies everyone’s intent and avoids misunderstandings later on.
2. SDE (Seller’s Discretionary Earnings): |
Let’s keep this one simple - SDE simply means the actual profit of a business, with any expenses that wouldn’t be necessary for a future owner added back in, and any revenues that wouldn’t come to a future owner taken away. For example, let’s say you ran a business with a net profit of $100k per year, but you were running $5k per year of personal health insurance through it, and were also collecting $10k of little fees for consulting per year that you ran through the business as well.
Rather than looking at the net profit of the business, a buyer wants to know how much it brings for them as a future owner, so your SDE would be $100k + $5k (add back) - $10k (take away), for a final SDE of $95k. This is the “true” profit of your business as it applies to a buyer, and the more you have created a clear picture of this as a seller, the more the business will appeal to a buyer. AS a buyer, you need to recognize the difference between net profit and SDE and learn to spot it so you assess the worth of the business correctly.
This is exactly what it sounds like. The seller of the business would help finance the sale. Most people imagine that all sales are made in all cash, up front, all at once. That is rarely, if not almost never the case. In reality, a lot of times, the business will be paid for in installments. For example, if there is a purchase price of $1 million, maybe $500k will be paid in cash up front, but the remaining $500k is paid off $100k per year at the end of every year. Knowing this helps you be more flexible and get more money in the long run as a seller and helps you buy a business more profitably as a buyer, because the business will pay for itself with the profit it makes after the sale if done right.
This is just seller financing with rules. An earn out means part of the sale price will be financed in installments, only if certain things happen. It doesn’t have to be the WHOLE portion of the seller financing either. It could look like this: if there is a purchase price of $1 million, and $500k will be paid in cash up front, but the remaining $500k is paid off $100k per year at the end of every year, maybe the first $300k only gets paid if the business hits certain revenue targets. This helps keep the buyer and seller aligned on goals, rather than the business having any kind of sharp decline after the sale. This would be especially important to have in a deal if the business is highly dependent on sales the owner is bringing in themselves.
One thing a lot of people worry about is that if there are any “skeletons in the closet” of a business, then they are responsible for them after they buy it. In reality, you can’t ever know everything, but you can avoid financial liability by doing it “cash-free, debt-free.” This just means that when a sale is finalized, all cash in the business is kept by the seller, and any debt or liability like a lawsuit is also kept by the seller. It’s a clean slate for the buyer. You should do it this way to protect yourself as a buyer, and you should offer this to help close the transaction as a seller, because it will reduce risk in the buyer’s mind.
Understand these. Internalize these. Remember them when you need to. If you speak this language, not only will you be able to navigate transactions more smoothly, you will also be able to make better deals.
Also - I recently made a video walking through exactly how we evaluate deals we might want to do. If that interests you, check it out here: https://youtu.be/e3AbQhuv_ow.
Be great. Keeping growing and aspiring. And as always: I hope you got something from this.
If you did, share it with a friend who may too, as this is the best way for me to grow it and make this better.
They can even sign up here :)
Happy value-building to all of you!
See you next time for Better Business Brief,
-Brody
