Using an Earn Out to Increase the Sales Price of Your Business
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Imagine you have a fast growing company. You took the time to build your business on solid principles and the numbers look great. In fact the numbers look so good that potential buyers are questioning the accuracy and reliability of your numbers. The buyers are concerned this is a fluke or this is because of you and when you leave the number will vaporize with you.
You know the numbers are good and are confident that the numbers will remain for years to come. Without a tool to give the buyer confidence, you will forced to sell the business based on today’s numbers and miss out on compensation for future growth.
So, how do you convince a potential buyer to take the risk and buy this business?
Buyer are risk averse and are going to be hesitant if a business looks “too good to be true.” Often with a premium asking price and amazing numbers, short of a earn out, the deal dies due to the high level of risk for the buyer.
An earn out is a tool used to bridge the gap between the present and the future and cut the risk for buyer.
The way an earn out works is the buyer agrees to pay a set price down and then a set price over time based the results of the business as they run it. In essence, an earn out allows a buyer to offer a price based on today’s numbers and then an additional premium based on set criteria for a specified period.
Take for example, the buyer might offer $ 1M now and then an additional $ 300,000 per year for the next 3 years if sales continue to increase at 10% per year.
This structure rewards the seller for a well-built business and minimizes the risk for the buyer.
An earn out is often used when small companies are in high-growth and also for companies in the high-tech or service industry. The buyer typically pays 60-80% of the purchase price up front with the remaining 20-40% structured as an earn-out and paid over time as the company achieves certain levels of sales or profitability.
Earn outs can also be used to motivate the existing management during the earn-out period to achieve good performance. When a buyer suspects that the results of the company are based predominately on 1 or 2 key people, the buyer may offer an earn out based on the those 1-2 people staying with the company and results being achieved.
An earn out is one of many tools that professional business transfer specialists, like a business broker, use to reduce risk and get businesses sold that might otherwise go unsold or sold at lower prices.
For more information on how to sell your business, download the free report 7 Critical Points Every Business Owner Must Know Before Selling Their Business.
Kimberly Deas is a Business Broker in Jacksonville, Florida. As an expert in marketing, Kim can not only sell your business, but sell it fast with targeted marketing.
BlackRapid’s Small Business Success
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