Business For Sale & Franchise Search Engine  
   
My Account
Search Businesses For Sale
Location:

Category:

to refine your search results use advanced search  
Franchise Opportunities

Sell Your Business, Starting at $20.99 per month
Small Business Resources > The Many Different Deal Structures When Selling a Business

The Many Different Deal Structures When Selling a Business

Business sellers should be prepared for the multitude of different deal structures that they should expect from various buyers. A business sale often consists of multiple elements like cash at close, seller notes, earn outs, non-competes, escrow accounts, etc. More often than not a first time seller will actually put out his or her hand in a stop gesture and reply, "I only want the full price in cash at close." This article will discuss some of the selling company characteristics that directly effect both the selling price and the terms.

Selling Company Revenue Composition - This is a very important factor in determining how much a buyer will pay for your business and how much will be in cash at closing. If 80% of your annual revenue is a result of contractually recurring revenue, you can command both a premium price and a deal heavily weighted in cash at close.

On the other hand, if you have little or no contractually recurring revenue and are heavily dependent on net new sales from new clients, your sale price will be far less and you will be expected to receive a significant portion based on a future performance earn out. Companies that can demonstrate historically repeatable revenue with long term clients will fall between the two extremes mentioned above.

Selling Company Management Depth - If every aspect of the company's business funnels through the two key partners who are close to retirement age and there is a huge gap in management depth and capabilities, this is risky to buyers. They are not inclined to write a big check to the owners only to have them walk out the door with their relationships and knowledge six months later. The more decentralized the customer and supplier relationships are and the more widely dispersed the intellectual property is, the higher the sale price and the higher the percentage of transaction value is at close. If it is all concentrated, the buyer will want the insurance of a transaction structure that pays over time based on future company performance.

Selling Company Customer Concentration - You can absolutely correlate purchase price and cash at close to this element. Let's say, for discussion purposes, that you had two identical companies in revenues, profits, profit margins, and EBITDA. Company A has no more than 5% of their revenue coming from a single customer. Company B has 40% of its revenues coming from four large blue chip accounts. Company A will sell for a 15-25% premium to Company B. Also Company B will command only 60 to 70 % of the cash at close that Company A commands. Customer Concentration is a big risk factor for a buyer that can not assume that the relationship dynamics will be the same once the principals leave.

Main Street versus B2B Company - Typically the issue of seller notes comes up with an individual buyer that has limited resources and is attempting to buy a main street type business with as much leverage as possible. Corporate buyers seldom utilize this vehicle.

Escrow Account Requirement - This is a portion of the purchase that is held by a third party Escrow Agent with instructions on how the funds can be released to the seller. These are typically required by a buyer where they perceive the risk of a future event such as product liability, a pollution issue, or an outstanding law suit. The funds are held for a period that could extend for several years if there are unresolved issues of this nature.

Professional Services type firm - Your company literally walks out the front door each evening. These may be consulting firms, accounting firms, executive recruiting firms, ad agencies, etc. Your producers have developed their book of business and their loyal account relationships. Your clients are customers of the company, but may be more loyal customers of their professional contact person. Sales transactions for this type of firm can involve a very heavy earn out component to protect the buyer from a mass exodus of clients because the professionals leave the firm post acquisition and take their clients with them.

Non Compete Agreements - these are pretty much standard for prudent buyers buying a company and not wanting to defend themselves against the former owner who gets bored with retirement and decides to start a similar business. The seller should get some compensation for the agreement and the more restrictive the agreement, the higher the compensation.

Stock Sale versus Asset Sale - Most large corporations "have a policy" that they will only do asset acquisitions as opposed to buying the stock of a target company. There are some very good reasons to do this. When you do a stock purchase you get all the assets and all the liabilities both known and unknown. If you look at the reasons buyers have escrow accounts, many of the same reasons apply for wanting to do an asset acquisition. They simply are buying identified assets and the remaining corporate shell is still owned by the previous owner with all the liabilities not specifically identified in the asset purchase agreement.

If the seller is a C-Corp, however, it is a major negative from a tax perspective to do an asset sale because the sale of assets is taxed as ordinary income at the corporate tax rate. The proceeds are taxed again at the owner's long term capital gain rate when the funds are distributed to him. For companies that do not have the escrow type potential liabilities, a stock sale may work. A buyer could successfully offer a significantly lower price with a stock purchase than a competitor requiring an asset purchase. The seller should analyze the two transactions from an after tax proceeds perspective to determine the superior offer.

If you are a business owner contemplating a business sale and you want the highest purchase price and the most cash at close, analyze your company based on the factors above. If you can implement changes that correct some of these risk factors you improve your odds of your best exit.

About the Author
About the Author
Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, representing owners in the sale of privately held businesses. We provide Wall Street style investment banking services to lower mid market companies at a size appropriate fee structure.











Related Resources
Selling a Business
12 Laws of the Business Buying and Selling Jungle - PART I
12 Laws of the Business Buying and Selling Jungle - PART II
3 Reasons To Sell Your Business Now For Maximum Profit
8 Key Steps to Selling Your Business
A Simple Formula For Increasing The Value Of Your Business
Are Business Brokers Licensed?
Auto Franchises
Build Business Value – Before Selling A Business
Business Brokers
Business Lawyer
Businesses for Sale by Owner
C-Corp Asset vs Stock Sale Dilemma
Capital Gains Deferral in a Business Sale
Closing The Deal
Coffee Franchises
Due Diligence - Not As Scary As It Sounds
Financing The Deal
Food Franchises
Franchise Information
Franchise Reviews
Free Small Business Magazines
Great Reasons to Sell Your Business and How to Do It Right
House Cleaning Franchises
How Much is My Business Worth?
How Not to Sell Your Business
How to Sell a Business Online
How to Sell a Small Business
How to Sell Your Business
How To Value A Business
Hurricanes Affect the Value of Florida Businesses
Important Tips When Selling a Business
Preparing a Business for Sale
Protect The Merger Or Sale Value Of Your Business: What You Can Learn From The DaimlerChrysler Deba
Role of Business Brokers in Selling a Business
Run Your Business Like You Have To Sell It
Sell a Business
Sell a Franchise
Sell My Family Business - Deciding to Sell the Family Business
Selling A Business - The Eleventh Hour Contract Change
Selling a Retail Business – How to Sell a Retail Business
Selling a Troubled Business
Selling Your Business - A Tool To Reduce Capital Gains Taxes
Selling Your Business - Prepare for the Buyer Visit
Selling Your Business - Should It Be a Do It Yourself Job?
Selling Your Business - Ten Steps to Increase Selling Price
Selling Your Business - Tips to Selling Your Business
Selling Your Business - What Would Sam Zell Do?
Selling Your Business - Why Use a Business Broker
Selling Your Technology Company - Why Earn Outs Make Sense Today
Should I Use a Business Broker to Sell My Business?
Should I Use a Business Broker to Sell My Business?
Small Business Debt Relief
Tax Tips on a C Corp Asset Sale
The Many Different Deal Structures When Selling a Business
The Pricing Dynamics of Selling a Business
The Ten Commandments of Selling My Business
To Sell a Business or Not Sell a Business A Crossroads Decision
What is a Business Broker?
What is a Covenant Not to Compete?
What is a Letter of Intent?
What is an E-2 Visa?
What is Cash Flow?
What is Due Diligence?
What is EBITDA?
What is FF&E? - Furniture Fixtures and Equipment
What Is My Business Worth? Learn How Small Businesses Are Priced
What is Seller's Discretionary Cash Flow?
When is the Right Time to Sell My Business?


©2017 BusinessMart.com.
Broker Membership | Terms Of Use | Financial Disclaimer | Privacy Policy | Cookie Policy | Resources | Franchise Opportunities | Website Traffic Ranking | Sitemap | Careers | Contact Us