4 Common Sales Structure Types
As a M&A professional representing Sellers and Buyers I see a lot of sales structures and deal types. I wanted to share 4 of the most common structures that I see for the sale of a business. These are based on a $1.5 Million Sales Price.
A. All Cash. This is usually paid in full at close, but at a discount from the full Asking Price, usually 10-20%. You could expect to see $1,350,000 – $1,200,000 at Close for a $1.5 Million Sales Price.
Advantages: Quick and you don’t have to rely on a bank for funding. Disadvantages: Buyers generally aren’t willing to pay full price for an all cash structure.
B. Cash with Seller Carry. I usually see 10% Seller Carry so you would get $1,350,000 at Close (for $1.5 M sale) and be paid over time, generally 3-5 years for the remaining $150,000. If the interest rate is 6% the Seller would get paid $190,000 total so they make more money with this, but have to wait 3-5 years for the remaining money.
Advantages: Sellers get more money for their business in the form of interest and can save money on taxes. Disadvantages: Purchasers sometimes don’t pay and Sellers run the risk of non-payment.
C. Earnout. This includes an up-front down payment, usually at least 50% of the Sales Price and then the rest of the Sales Price is earned over time and variable. Using a 50% down scenario, the Seller would get $750,000 up front and be paid based on the profitability of the company over 3-10 years for the rest of the money and potentially “earn” more money for the business.
Advantages: The advantages to this are: Sellers could be paid much more for the business if it does well. This usually works well when the owners are staying to work in the business and not retiring from it at Close. If the business does better than expected, the Sellers get more money for their business over time. Disadvantages: Sellers have to wait to get paid and if the business does poorly under new management. Sellers can get less money than the other options.
D. Seller financing of 100% of the purchase price. This is used most often for a partner buy-out or buy-in. The Purchaser gains ownership from the beginning and his/her share of the profits are used to buy his/her share of the business.
Advantages: A Purchaser can own a business with little or zero down payment. The sales prices is established based on some set criteria negotiated and can be higher than the market price. Disadvantages: Sellers get paid over time versus up front.