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.
If you intend to list your online business for sale, it’s important to understand the entirety of the process, as well as the different ways that you might be able to receive an offer. Not all online business deals look the same. In fact, you need to be familiar with deal structure and financing.
Hiring the services of an experienced and competent online business broker is often the first step towards clarifying your goals and making next steps. Understanding how deal structures work can minimize your confusion and help you approach the process successfully when you have finally identified a buyer who is right for you. If you have never closed on the business deal before, there is a chance you might not have even considered deal structures.
However, deal structuring is the key of online business sales and advantages can be lost or gained depending on how negotiations occur and how the deal is structured. The negotiations are often the most exciting and important aspect of selling your online business but are all too often overlooked in the brokering space. Some online business brokers choose to focus on the multiples available for sale and how to prepare a business for sale itself. But the right online business broker will help you by preparing you to structure a sale for success.
There are three primary transactional structures in the mergers and acquisitions of the online business world. These are mergers, stock purchases and asset purchases. A merger is a situation in which two business entities combine to become one legal entity. The company that is being purchased provides cash, buy your company stock or it makes it both to the stockholders during the merge. A stock purchase involves all stockholders purchasing each piece of stock.
D One buyer’s entity will remain the majority owner in the company and the company remains intact, and then the buyer takes over all liabilities and assets. Finally, an asset purchase involves a buyer who chooses only to purchase the assets for the target company.
The buyer only assumes individual liability and responsibility for items that are listed in the purchase agreements. Since the buyer has the potential to only assume the liabilities they want to have control over, this is one of the simplest, cleanest and most preferred ways to go about buying the business.
What you must decide whether or not it is in your best interests to offer your company for sale in this manner. Scheduling a consultation with an experienced online business broker is the best way to discuss the options available to you as someone preparing to list your company for sale.
Choosing the Right Sale Method for You
With so many different avenues available to you individually, it pays to have the expertise of someone who has worked in this field for many years and who can guide you through the process of understanding an online business sale for maximum effectiveness.