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Understanding Earn-Outs in An Online Business for Sale

Posted by Remy Belanger in Articles

Structuring your asset purchase using a strategy known as an earn-out is a popular way to handle the deal, and one that your online business broker might recommend directly. The most common method of using an earn-out involves a structured deal with financing that is handled by the seller.

Earn-out Financing Basics

Typically, this financing unfolds over an extended period of time. The buyer has the responsibility to lay down a significant down payment on the business, and then the seller finances the remainder by allowing the buyer to make payments and pay-off the company over time. The seller financed money is nearly always interest-free, meaning that this is a big win for the buyer. In a sense, if you choose to go the route of using an earn-out with your online business sale.

This is like getting a 0% interest loan from the seller. As a seller, however, there may be additional reasons for you to offer earn-outs. As a seller, you should consider offering for an amount and charge interest over the period of the buyer making payments back. This is a good way to minimize your own risk in case the buyer were not to pay the earn-out, and you can earn money above the actual list price of your business and extend the period of time for which you received that money.

It is essential to have trust in the buyer and seller relationship in order to take the risk with financing using this earn-out strategy. In the event that the business buyer is someone who is just beginning or might not have the capabilities to maintain the company or bring it to the next level of success, an earn-out might not be recommended since your company and your finances are on the line.

In the event that the business fails due to the buyer’s lack of expertise or ability to maintain it, the seller is unlikely to receive the remainder of their finance money.

Sellers who are no longer actively involved in the day to day management of their business should also avoid using earn-out as a method of financing. This is because you must become involved in the business all over again, even if it is to collect the funds that the buyer owes you on a monthly basis. An attorney or an escrow service can be helpful as a third-party service for leverage with an earn-out financing.

Having an online business broker who understands these aspects of listing your company for sale and who can advise you about whether or not an earn-out makes sense for you with how to proceed, can ease some of your fears and raise your confidence about the overall process of listing your company for sale. The support of a business broker is instrumental in helping you to list your company following the receipt of a fair valuation and to have a vetted pool of buyers who are interested and prepared to buy your business.