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Financing the Sale of your Business – Buyers want more than just banking and seller paper

In previous blogs, we have discussed seller paper and SBA financing which with buyer cash often comprise the three major components of a business purchase. But what happens when a really good buyer (as perceived by the seller) wants to buy the business, but a gap in what the buyer is willing to pay and what the seller will take cannot seem to get closed?

Under the above scenario (which is not all that uncommon), a business broker or other facilitator must get creative in conceiving other sources of payments to the seller which are palatable to the buyer. Let’s discuss some to them…

  1. Employment Contract/Consulting Agreement – This is something which buyers are often willing to pay to sellers as buyers want to retain access to sellers to address future business ideas and/or problems, By having a written agreement in place which generally does not require specific duties of the seller while being very specific on compensation, the buyer has no hesitancy in reaching out to the seller on an as needed basis.
  2. Non-compete – While many deals include a non-compete clause as part of the purchase price, often a buyer will pay for a longer, more favorable non-compete than what might normally get included in the deal agreement.
  3. Earn out – This component is an add-on to the deal and specifies subsequent payments over a period of years (generally less than five) to the seller if certain benchmarks (often sales targets or profit levels) are achieved by the business under the buyer’s management.
  4. “Second bite of the apple” – More sophisticated buyers realize that an excellent way to close a purchase price gap is to offer the seller a minority interest in the new entity at a “bargain price.” There usually is an exit plan for the seller’s new minority position which could pay him a significant sum if the business does well in the post-sale years.
  5. Sales rep agreement – Often a major or favorite account will be assigned to the seller with the understanding that for limited responsibility (i.e. mainly functioning as a goodwill ambassador) the seller will be compensated with a certain percentage of sales from such an account for a period of a few years.

On “difficult deals,” it is not uncommon to see some combination of the five above non-traditional payments account for 25% of the total purchase price. While most of the above have favorable income tax consequences to the buyer, some can be structured to be neutral to the seller. It is always a good idea to confer with a professional knowledgeable with respect to how the tax code treats various deal components.