Ways to pay the seller when you buy a business
Buying a business, whether it’s a main street business, SaaS business or eCommerce business is a process, not an event. A lot of time and energy goes into search and due diligence. The truth is, a potential seller is not always looking to sell to the highest bidder, but rather to a buyer who suits the business goals and has the passion to carry on its legacy. Also, a potential seller looks at offers with better overall terms and structure, an example would be the process of how the buyer plans to pay for the business and whether it will be an asset purchase or share purchase. This can be the determining factor if you are closing a deal or losing a deal. The main goal is to find a mutually beneficial approach for both you and the seller. The concept sounds pretty easy and straight forward, however, it can be difficult to navigate.
So, are you ready to buy a business? Let’s break down some ways you can pay the seller:
Upfront Cash
Usually by wire transfer or EFT sourced from a combination of equity and a loan (sometimes multiples loans).
Earn Out
Typically, an additional payout to the seller based on future performance. Think of it as a percentage of EBTIDA, a percentage of net income, a percentage of revenue, retention of key clients, and so forth. Sometimes earn outs comes with a floor (minimum) and/or a ceiling (maximum).
Seller's Note
A promissory note where the seller is the lender and the buyer is the payor. Length of term varies as sellers want it as soon as possible and buyers would like it spread out.
Stock in the Acquirer
You may want to offer a seller stock in the company for some portion of the purchase price. It doesn't help the seller get liquid, but it could help the seller make more money. There’s a lot of due diligence by the sell-side team on this one to vet you and your intentions as a buyer.
Salary/Bonus
Doesn't count as purchase price (ex. it doesn't get taxed as capital gains), but sellers often consider it part of their total package, especially when the salary and bonus are significant.
Commissions
Similar to salary/bonus in that it does not count as purchase price, but if it is part of a package, it could be lucrative. It could also be sales commissions or other business development incentives.
Real Estate Leases
If the seller owns the real estate, they can lease it back to you as the buyer. With the right lease and the right buyer, sellers can refinance and cash out, resulting in obtaining additional cash relatively soon after closing.
How you pay the seller when buying a business matters. Enter negotiations with openness and intentions to create mutually beneficial terms. If you let ego drive the conversation, it will stop any deal in its tracks.
Opinions expressed here by contributors are their own.
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