New Jersey Business Brokers: Article About Developing an Earnout Strategy
When you receive a serious yet low offer to purchase your business, you must weigh the advantages of a quicker sale versus the gamble of waiting for a better offer. One solution is negotiating an earn-out stipulation that promises an additional future payout should specific conditions be met. Because this can be a touchy and complex negotiation, make sure your New Jersey business brokers are with you every step of the way.
You should both have a clear understanding of the discrepancy between what you are willing to accept for your business and what the buyer is willing to pay. Through your business brokers, each of you should be aware of the other's reasons for his or her financial position. Both parties must be willing to negotiate to narrow the gap. Your broker should verify that the purchaser is willing to consider an earn-out provision.
Once this common ground is established, you and your buyer must agree on the specific activities you are expected to accomplish to collect the earn-out. For example, the buyer may ask that you stay on as the head of production and increase output by 20 percent over 24 months. Whatever the earn-out proposition, it is important that it is clear and specific.
Your ultimate payoff for successfully completing the required tasks must also be clear.
The business brokers from Selby Associates of New Jersey would be happy to answer any question you have about corporate exit planning or business mergers.
Your broker should record the terms of the earn-out in writing. The final agreement should specify a performance target, the term of the agreement, how the earn-out payments will be distributed and the method of payment.
The performance target can take one of several forms. It could be quantified in terms of revenue or profit margin, such as a net increase of 10 percent. It could instead relate to the successful attainment of a business goal, such as a merger with another company. A performance target ideally aligns with both your and your buyer's objectives.
The term of the earn-out involves a specific time frame with a starting and ending date. Make sure that the amount of time in which the seller allows you to attain a revenue or performance goal is reasonable. If you want to be free of the business in two years, don't sign on for a three-year earn-out term.
Distribution of payments may be a lump sum or a series of periodic payments. The form of payment is typically cash although you and your seller may make other arrangements.
Having an earn-out provision in place is a good compromise. It makes it easier for you to accept less up front for your business and for your buyer to get the purchase deal that seems fair. The buyer benefits from your help with the business, and you benefit from earning additional capital.