Time to Sell? Structuring an Earn Out

Filed in archive Financial on March 16, 2010

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We've seen a lot of hard times recently and many small and mid-sized business owners are prepared to walk away. Selling your business is obviously a much better option than just letting it circle the drain until it goes on down the pipes and out into your septic tank. Nobody really wants to go bankrupt.

So what do you do when you find a buyer and your buyer thinks your business is worth 15% less than what you think it's worth?

Inc.com ran a useful piece earlier this month on how to structure something called a earn out. An earn out is a financial tool that can bridge the gap between what you think you should get and what your buyer wants to pay.

A common feature of many acquisitions, an earn-out stipulates that the original owners of a business are paid for the sale of their company, following which they are contractually obligated to stay with the company through a transition period, and they are provided with the incentive to have a demonstrable effect on the company's financial performance going forward.

The Inc.com article looks in some detail at the concept and includes a couple of examples. If you're considering selling your business, it's a strategy worth considering...