Buying a business

Different ways to structures the sale of your business

A free-and-clear cash out deal may not be the best way to sell your business. There’s a few reasons for that. The biggest one is that it might not net you as much money for the sale of your company as other arrangements.

Risk can affect price

Investors see risk as a deterrent. In other words, they’ll want to give you less money for a riskier proposition. And there’s risk in 1) tying up a lot of capital in a single investment, and 2) suddenly and completely separating a business from it’s current owner. You can structure a deal with this in mind to give the buyer certain reassurances.

Another reason you might need a more sophisticated deal structure is to see that your life’s work doesn’t go down a road you never intended, after it falls into somebody else’s hands. The right deal will let you maintain some involvement in the business as you move ahead.

A third reason to look at options beyond a cash deal is that you don’t need such a large sum up front. Maybe you know you’re ready to move on, but don’t know what you’re going to do next. If you’re trying something new, you don’t know whether it will work out. In this case, reducing risk for the buyer can actually reduce risk for you. You can have a safety net in the form of steady income and/or an ongoing position in your old business.

Further, if you’re retiring, you might end up bored. Perhaps you can structure the deal so that you can contribute to the company on at-will basis — and receive compensation accordingly.

One more reason to be open to other deals is that it works well for the buyer. You could have a tough time finding a buyer who is able to do a cash out deal, let alone interested. And that’s not to say that this is a terrible option. If that’s what works for you, it’s what works. But be open to other arrangements, because they might suit your needs even better.

Types of arrangements

Control of a business can be transferred in two ways:

1) a sale of the assets of the company (physical equipment, facilities, contracts, software, intellectual property, etc)

2) a sale of the equity of the business. This means selling the stocks if the company is a corporation, or the member units if it’s an LLC

The main points of consideration when choosing between the two are tax concerns and liability. When it comes to the structure of the deal, you have also have two options: let’s call them “guaranteed” and “contingent”. In a guaranteed deal, you decide before finalizing the deal how much the payout will be. This could be a lump sum up front, or it could be a series of payments.

In a contingent deal, the buyer is assuming less risk for the purchase price. That’s because payment is contingent on certain conditions being met down the road. For example, the seller could be required to stay on in some capacity, at least for a term, and help the company meet performance goals.

Or, the seller could leave the business and future payments could be a percentage of business proceeds. This assures the buyer that the seller believes in the future of the company.

Examples

There are many ways to structure the deal. This is good for both parties. A nuanced deal can be difficult to iron out, but it gives you the flexibility you need to make both parties happy. Here are a few example arrangements:

1. Accept a lump sum as a down payment, and accept pre-determined installments over time. This is essentially an agreement about a total sum, but financed over a term to ease constraints on buyer capital.

2. Accept equity in the business. Rather than take installments of a pre-determined lump sum, you can accept a share of revenue. This is the same as holding shares in a business, and collecting dividends. But even if you settle on a sale of assets, rather than equity, a similar arrangement could be worked out.

3. Accept a down payment, plus shares/equity. You get a lump sum up front, plus a stake in future proceeds.

4. Accept a down payment and/or equity shares, plus compensation for future contributions. You get a nice sum up front, plus the security of future work. You also show the buyer you believe in the future of the business, and are sticking around to make sure things go smoothly.

When it comes time to exit your business, don’t constrain yourself to these examples. In order to get the most value out of the deal, you’ll need to be open to creative and nuanced arrangements.

Free Vector Advisors is here to help business owners in Palm Springs, Seattle, Bozeman or Pittsburgh navigate the selling process and get the highest price for their company. To discuss the future of your company, you can fill out one of our contact form here.

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