Taking an Earn-out to sell a business
If you own a business and you think it is time to sell, an option to add to your tool kit is whether or not you would be willing to receive an earn-out as part of the purchase price of the business.
What is an earn-out you ask?
An earn-out means agreeing to receive part of the purchase price of the business over an extended though relatively short period.
Let us look at an example so it makes sense. The buyer and seller negotiate a final purchase of the business of say $500,000. The buyer agrees to make a down payment of 25% of the purchase price or $125,000, the seller agrees to carry a seller’s note for 40% of the purchase price or $200,000 and then both parties agree that the buyer will pay the seller the remaining $175,000 or 35% of the purchase price in quarterly installments as an earn-out.
There are different ways to structure an earn-out
To keep this simple, the buyer agrees to pay the seller the $175,000 over 3 years based on the gross sales of the business. To say this another way, the seller demonstrates their faith in the ability of the business to reach certain sales levels and when this happens, it triggers the quarterly payment to the seller. By agreeing to this approach, it demonstrates to the buyer that the seller believes the sales targets are achievable and thereby encourages them to accept the deal.
Another value to this approach is that it helps a seller agree to sell their business if they expect the business is about to take off and they wish to receive some of that reward. The Great Recession has been long and difficult. The economy is getting stronger and many owners are ready to sell but want to receive some of the rewards for keeping the business going during the recession. An earn-out is the perfect way to create a win/win scenario for a seller and buyer and share what will hopefully be an upside risk to both parties.
The timeline of an earn-out
The timeline of an earn-out is typically between three to five years. It is not a good idea to make it too long as the reason the owner is selling in the first place is so they can be free to move to the next phase in their life and let go of the day-to-day responsibilities of owning and operating the business. If the timeline is too long the owner will be reluctant to sell.
If the seller of the business wants to provide some protection, a couple of good steps to take include a clause in the agreement that both the seller note and earn-out will be paid in full if the business is re-sold during the term of the agreement.
The option of using an earn-out is a great way for a seller to maximize the price they get from selling their business. It is important that they feel they can have a good relationship with the buyer and that their interests are joined. That is, if the company is successful then that is a win for the seller and a win for the buyer.
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Final Take
In the world of selling businesses, negotiation skills, and strategy are paramount. Leveraging profit multiple valuations is your secret weapon. Armed with this tool and professional guidance, you’re on your way to a successful business sale.
Your journey toward selling success begins by understanding the power of profit multiple valuations in negotiations. So, gear up, stay prepared, and may your negotiations be fruitful and your retirement satisfying.
Understanding EBITDA multiples in your industry isn’t just a nice-to-have; it’s a must-have in your business sale toolkit. Whether you’re in healthcare, commercial property, technology, manufacturing, or any other sector with businesses boasting annual revenue of $500k and above in California, these multiples play a pivotal role in driving the success of your sale.
By diving into the nuances of your industry’s EBITDA multiples, partnering with experienced professionals, and strategically leveraging this knowledge, you can position your business for a lucrative sale, setting the stage for a fulfilling retirement.
If you’re ready to embark on this exciting journey, armed with the wisdom of EBITDA multiples, I’m here to guide you every step of the way. Your business sale adventure begins now!
There are many different ways to value a company. The key is to use the right method for your specific situation.
If you’re a business owner looking to sell your company, you should use more than one of the valuation methods to determine your company’s worth before putting it up for sale.
If you need help with determining your company’s worth, schedule a free consultation with Andrew Rogerson. He can help you determine the best way to value your company and maximize its value.
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- How Do I Calculate The Value Of My Business To Sell In California
- What is My Business Worth? | Valuing and Selling Your Business
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- How To Value A Business Quickly: Best Business Valuation Formula
- Seller’s Discretionary Earnings (SDE) Valuation | Selling a Business in California
- Valuation Formula: 10 Most Used Valuation Calculations | Quik Biz Valuation
- The Secret Sauce to Selling Big: How Multiple of Earnings Makes it Happen
- Financial Due Diligence When Selling a Business
- Income Approach Business Valuation Formula
- Small Business Valuation Multiples
Do you have any questions about how to value a company? Leave a comment below and we’ll be happy to help!
Closing Note
Using the best valuation formula to determine your biggest asset’s worth, as well as the decision to exit business ownership, is a significant life event. There could be plenty of emotions involved.
When you collaborate with a business brokerage firm in California, it will provide all the solutions and insights toward getting the most out of the business sale.
There are only a few ways to sell and value a business quickly in California, and an experienced business broker like Andrew Rogerson can guide you through the best strategy.
It is currently the perfect storm to value and sell your business in California. With the great resignation that started during the pandemic and the trend to continue till 2023, there are no shortages of experienced and well-financed buyers looking for the next opportunity to grab.
With a certified business intermediary at your side, we feel confident that you will sell your business in California quickly and at the highest price.
Andrew Rogerson is a certified business broker based in Sacramento, California. Call Toll-Free at (844) 414-9700 or email him at support@rogersonbusinessservices.com services the whole state of California.
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I am totally agree with you but at the time of selling a business the main important thing is the valuing the business according to the condition of business.