Creative Solutions in the Sale of Your Business - The "Earn-out"

[Stacy L. Alario, FCBI]

http://www.americanbusinessbrokerage.org

Creative Solutions in the Sale of Your Business - The "Earn-out"

In the present uncertain economic environment, which includes decreased revenues, minimal profits, extreme difficulty with institutional financing and ultimately lower business values, business owners considering the sale of their businesses are facing new and significant challenges.

One often misunderstood approach and a creative solution for sellers is to consider an earn-out program. This application can create an avenue to selling a business under difficult market conditions. There are often times and circumstances in which earn-outs can be very rewarding to a seller.

A few include the following:

· Seller and buyer disagree over projected earnings or other factors of value for the business. An example of this could relate to a new product line which is just being introduced to the market and has not reached its potential.

· Historical financial documentation may not illustrate the future opportunities available to the purchaser when determining a purchase price.

·Uncertainty over the impact of uncontrollable factors such as off shoring, currency variations, or commodity prices to name a few.

There are many structures of Earn-Out Programs and some may use one of the following:

Royalty payments based on a percentage of total sales, or a percentage over a predetermined threshold, such as gross profitability.

Commissions paid on certain customer accounts, products or sometimes both.

Profit sharing based on a percentage of profits over a predetermined threshold.

Management contracts are paid when certain predetermined criteria and/ or milestones have been met.

The economic downturn has prompted more sellers to consider and accept earn-outs as a creative option of pricing and terms relating to the sale of their companies. Business owners are hopeful that their company's flat or declining performance will turn around quickly as the economy improves, yet buyers are very concerned about paying for future projections in uncertain times. An earn-out can be a viable solution to bridge the disputed valuation gap.

Stacy L. Alario, FCBI and American Business Brokerage have been assisting buyers and sellers for over thirty years. For a confidential appointmnent to discuss your exit strategy or if you are interested in aquiring a business, please call Ms. Alario at 941.957.1414 or email her at [e-mail]

American Business Brokerage

...we sell businesses confidentially.