Here is part 6 of our 10 do's and don'ts of business selling. We gained these insights from hard-won experience and observing what can happen in the business selling market!
6. DON’T – Refuse to 'stand behind' your sale
Do – Offer after-sales service
When a business sale price is over half a million dollars and into the several million dollars bracket, the concept of earnout clauses, or deferred payment, often comes into the negotiations.
This is about the purchaser saying: “I’m buying a business’s future business maintainable earnings (BME) – I want to ensure that as I take over, the customers and suppliers will stay with the business, and the business will continue to perform as it has done over the period I’ve assessed in the due diligence.”
For a purchaser to manage this risk, they will often pay an amount of the purchase price upfront and then defer an amount based on certain terms.
These terms are designed to protect them against situations such as customers and supply contracts not being retained under the new ownership.
Be prepared to share the risk
We tell vendors in this sale price bracket they need to be prepared to consider ‘after-sales service’, in other words holding and sharing some of the risk over the transition period to a new owner of their business.
This is tricky because the old owner will think: “I don’t have control of the business anymore and yet I have funds outstanding – I’m taking a big risk.”
However if you have a strong business that you’re confident will continue to perform in the hands of a new owner and you’re willing to prove that by deferring payment, that will go to supporting the view the business has a significant goodwill value.
…but don’t forget to protect your risk, as well
Be careful to ensure the terms of any earnout or deferred payment protect your risk as well – you must have a fair chance of getting your deferred payment.
One way to protect your risk would be to restrict the terms under which the deferred payment is paid.
A reasonable term to agree to may be that existing contracts in the business need to be maintained post-sale.
However a term that asks you to achieve a certain BME can be fraught with danger, because a new owner may have a different attitude to things like business development and how they spend money in the business, and that will impact earnings.
If you would like advice or support to sell your business, contact the experienced team at JPAbusiness for a confidential, obligation-free discussion.
From the JPAbusiness archives, refreshed and checked for accuracy December 2016.
James Price has over 30 years' experience in providing strategic, commercial and financial advice to Australian and international business clients. James' blogs provide business advice for aspiring and current small to mid-sized business owners, operators and managers.