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Page 50
How To Investigate Any Business Opportunity
The process of price determination is sometimes described as horse trading. This element is important,
and undoubtedly both Rombaugh and Critser anticipated it in setting their asking and offering prices. But
granting that tactics and compromise play a part in price determination, other explanations often account
for the relative success or failure in the bargaining process.
Bargaining position. The price paid often reflects the bargaining position of one of the parties. Is the
seller's desire to sell stronger than the buyer's desire to buy, or vice versa? The reason behind the deci-
sion to buy or sell is important. This would be true of a seller who must sell because of age, health, or
personal financial reasons. If the buyer knows that sale of the business is urgent, the seller is less likely
to get a reasonable price f or his business, although the reasons bear no relation to the value of the
business or the ability of the buyer to pay cash.
The seller's willingness to finance part of the price, or perhaps all of it, will also depend on the urgency of
his need to sell. Sometimes a purchase price is agreed upon but later raised because the buyer is un-
able to get outside financing. The price may also be adjusted in order to get favorable tax treatment or in
exchange for more favorable terms in other aspects of the contract.
The time factor. Another important factor affecting bargaining position is the time element. When to sell,
when to buy. Economic conditions cannot be overlooked. The seller is more likely to gain his bargaining
objectives when business conditions are good, particularly if his business is sharing the property. During
periods of recession either general, local, or in a particular industry or activity - the pessimistic outlook of
both buyers and sellers tends to depress prices.
The buyer. Still another important factor is, "Who is the buyer?" To a person experienced in business
valuation, a business may be worth buying only at the liquidation value of the assets. To another buyer,
the same business may be the answer to a long-held dream of owning his business.
Liabilities
A buyer generally refers to purchase assets rather than stock for tax reasons, but his preference be-
comes even stronger because of liability considerations. In the assets transaction, the legal continuity of
the sellers business is broken. The sellers business liabilities are usually not carried over unless the
buyer assumes them by agreement.
Buyers often find an advantage in assuming obligations of the seller under leases, mortgages, or install-
ment purchase contracts. The seller may be willing to make some financial sacrifice to the buyer in order
to get out from under the payment burden - even though he remains liable for the obligation if the buyer
defaults.
But these are known liabilities. It is the unknown that the buyer fears in the stock transaction. Many li-
abilities, both existing and potential, are unknown at the time of contracting merely because of inade-