There are many options to be considered when structuring a deal to close the sale of your business. Of course, as the seller, you are going to want a deal that favors you, but you do not want to create a deal that a buyer will be unwilling to accept.
The trick is coming up with a deal that beneﬁts both parties and provides incentives for the seller and buyer to sign. There are a variety of ways to work out a deal ﬁnalizing the sale of your business.
Some of the most common terms to agree between buyers and sellers include:
- Earn-out: There are a couple ways to structure an earn-out deal. The ﬁrst is where the buyer pays for the business at the closing of the deal. The seller and buyer have another deal (outside of the sale of the business) where the seller is obligated to stay with the company for the next 2-3 years to help during the transition phase (i.e., the "Consulting" clause in buy-sell contract). As the seller, this can be beneﬁcial for you because you will continue to receive a salary on top of the proﬁts you made from the business being sold. This works out well for the buyer because they can shift some of the money that would be included in the closing costs into salary and bonuses provided to the seller, as long as the business continues to improve its ﬁnancial performance. The second option for an earn-out deal is where the seller is compensated in the form of bonuses paid to him/her over the next couple of years based on the company’s sales. This puts the buyer more at ease because the seller is now putting his/her money where his/her mouth is. They are investing in the business's future potential and the seller has a chance to make more than what they would have initially made.
- All cash deal: The entire sum of the deal is paid to the seller up front once the deal is closed. The buyer owes the seller nothing else and the seller receives all of their money then and there.
- Cash plus seller ﬁnancing: This is more typical than an all cash deal. In this case, the buyer pays the seller a portion of the price when closing on the deal. They also sign a promissory note, saying that they will pay off the rest of the deal (with interest) over a speciﬁc timeframe, this is known as an installment purchase. Sometimes instead of paying monthly payments to the seller, a buyer will request to pay a balloon payment. This is where the buyer agrees to pay the rest of the payment upon a future date after the closing. By doing this, the buyer can keep cash ﬂow working so they can transition and build the business up. When a seller offers to provide the buyer a loan, they are essentially putting their money where their mouth is. This shows that, as the seller, you have faith in the future and the potential of your business, which is more enticing for buyers.
As the seller, you will want to minimize the total taxes you’ll pay once the business is sold. The buyer is also going to want to minimize taxes on their end. The problem is that when a deal is structured, whatever the seller does to minimize his/her tax penalties will end up hurting the buyer and vise versa. By structuring a deal to minimize the combined taxes, the seller will end up adding value to the transaction.
When planning to sell your business, be sure you understand the different types of deals that can be structured, along with their tax implications. You are going to want to do your research so you can create a deal that not only entices a buyer to sign, but will also provide you with compensation for your company.
Related: Legal Steps to Selling a Business