The Settlement Statement: An Important Negotiating Tool

When purchasing a business or business assets, there are a number of components that determine what a good offer entails. One of which that often gets overlooked is the settlement statement. A recent experience I had with a client can clearly demonstrate how important this one document can be for making an acceptable offer.

I had a client recently who was far behind on his loan payments and was being threatened by his secured creditors. They wanted to put the company into receivership, but little did they know, this was a terrible idea. There were few desirable assets to liquidate and the receivables that existed were difficult to collect on (the reason the company was failing to begin with). Receivership would ruin what value existed in the company and the receivers fees would eat up much of what was collected, leaving my client a very large deficiency which would later need to be settled.

Luckily we got the bank to hold off with the receiver after we found an interested buyer for the business assets. We negotiated a sale which would be acceptable to the bank, but we were not able to easily satisfy their needs. The purchase and sale agreement named a value for all the business assets but the bank thought the offer was too low. This is often the case and can be fixed with one simple document: the settlement statement. Here is what our initial offer looked like:

Purchase Price: $100,000

Here is what the second offer looked like:

Purchase Price: $105,000

Office Furniture and Equipment: $30,000

Intellectual Property & Intangibles: $25,000

Accounts Receivable: $50,000

The second offer was accepted. Is it possible that the bank really wanted 5% more for the assets in order for it to be acceptable? I really doubt it. When we demonstrated to the bank where we thought the value was, they were able to understand why we were offering what we were offering. The truth was, the bank knew their ability to collect the outstanding receivables was very poor and their success in converting intangible property into cash was also quite poor as is the case with most banks. When they were shown that this buyer placed a higher value on the A/R and Intangibles, it made the offer more attractive as they would likely recover less than the $75,000 being offered for those two assets through their own liquidation process. One simple document really made the difference. When placing an offer to a secured party make sure you understand what their recovery process will look like so you can make an appealing settlement statement which will lead to an accepted offer to purchase.