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The Different Ways Buyers Pay For Companies

The Different Ways Buyers Pay For Companies

The Different Ways Buyers Pay For Companies

It is unusual when selling a privately held company to receive all the consideration in cash on the day the sale completes. In this article an experienced UK Business Broker explores different ways in which payments are made.

Every business seller prefers to be paid in full on the date of sale. Unfortunately our experience as a business broker working in the UK is that for private company sales, and especially smaller private company sales, this rarely happens. At least part of the consideration will be paid on a deferred basis, often but not always tied to the future sales or profits of the company.
What Are The Most Common Ways For Buyers To Pay For Private Companies?
Deferred Payments
Deferred payments have become a higher proportion of total consideration since the financial crash of 2009. Banks have completely withdrawn from providing credit to purchase goodwill for all but the very largest private company transactions. Pre-crash up to 25% of the total purchase price was funded in this way. This means that the shortfall has either to be made up from the buyer’s cash reserves, or more typically paid on a deferred basis out of the profits of the business over one or two years. Pre-crash deferred payments were typically 20-30% of the purchase price. Post-crash deferred payments make up 50% or more of many transactions. Another article in this blog Deferred Payments When Selling A Business explores deferred payments in more detail.

Earn Outs
Earn outs are a specialised type of deferred payment structure where the seller is expected to stay with the company for an extended period to deliver a growth plan. If the growth plan is achieved the seller receives a further payment for the company. Earn outs are most often used when a seller is projecting high levels of growth but the buyer is reluctant to pay a full price for potential. Handled properly they are an effective way to bridge the gap between buyer’s and seller’s perception of value. Another article in this blog “Earn Out Arrangements When Selling A Company” explores earn outs in more detail.

Consulting Agreements
Consulting agreements are used most often when the seller’s commercial or technical expertise is required by the buyer for an extended period after the sale. Sellers intending to retire may be reluctant to commit to an extended handover period, and a lucrative consulting agreement may be a way to bridge the expectations of owner and seller. Payments under consulting contracts will normally be taxed as income which is less favourable for the seller.

Equity Payments:
Buyers sometimes seek to reduce the initial cash outlay to buy a company by offering the seller shares in their own business. This may also be a way for the seller to share some of the future benefits if the acquisition is an outstanding success. As a broker we advise sellers to entertain offers of equity only where the buyer is a listed company on a recognised stock exchange. Minority stakes in private companies are almost impossible to sell until the majority owner exits, and so effectively worthless until that point is reached.

Commission Arrangements
In some industries it is not unusual for buyers to purchase a customer base and pay the seller a commission on the sales to these customers for a number of years. Some of our clients have made far more money in commissions by accepting this kind of arrangement than the buyer was prepared to offer as a one-off payment at closing. It is an arrangement we only recommend to sellers that can afford to take the risk of things not working out as hoped for at the time of sale.
The Realities Of Deferred Payment Structures When Selling A Company
An aspect of all these alternative payment structures is that payment of the full consideration is delayed to the buyer’s advantage. Part of your broker’s job is to negotiate a structure that keeps the delayed portion to a minimum, but this has become a greater challenge in these times of restricted credit. Some sellers are prepared to put part of the selling price at risk if deferring payments presents the opportunity for a higher overall pay out. Sellers finding themselves with no option but to accept an element of deferred payment should certainly attempt to use the situation as a bargaining chip to negotiate a higher overall selling price.

If you are interested in finding out more about these and other issues relating to the sale of a private company one of our business sale experts would be delighted to talk to you in complete confidentiality. Click CONTACT ME to book an initial phone conversation or call us on 01604 432964.

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