Different Payment Methods

When selling a business you want to clarify from the outset how you will be paid. You will need to consider several factors such as the tax implications when selling the business, the type of sale i.e. an asset sale or share sale and your future plans when the business has been sold (e.g. retirement, do you still want to be involved in the business, etc). The seller therefore has several options open to him when accepting payment for example:

  • Asset Swap
  • Cash and Shares
    • The Seller accepts part of the payment as money, with the remaining part of the sale price taken in shares in the new company or another company.
  • Cash Lump Sum
    • This is usually the preferred method and gives the seller a clean break from the business.
  • Deferred Payment
    • The buyer defers payment of all the monies to protect his position and to secure the cash flow of the business by making payments at agreed stages.
  • Earn out
    • The seller continues to run the business for the buyer and receives an additional sum which is dependent on the success of the business.Â
    • The buyer receives practical assurances in relation to the business and the seller achieves the price expectation of the business.Â
    • The seller remains motivated but the buyer must take into account the mindset of the seller as he is no longer the owner of the business.
    • When calculating the earn out payment it is imperative that the formula and timescales agreed upon by the parties are clear and unambiguous, as one of the biggest issues faced by buyers and sellers is when the payment should be made and the profit figure used to calculate the earn out figure.
  • Loan
    • The buyer may wish to offer part payment as cash and part payment by issuing shares in his company.Â
    • The buyer may also provide written promises to the seller. These are effectively loans that have to be paid back by a fixed date to the seller.Â
    • These loans can be secured against the assets of the buyer should the sum to be paid back be a large amount.Â
    • The advantage to the seller for accepting these agreements is that they can minimise and defer the seller’s tax liabilities.
  • Pre-Sale Dividends
    • If the target company has a significant amount of undistributed profits, by issuing these undistributed profits as dividends to the selling shareholders the value of the target company and the price the buyer has to pay can be reduced.
  • Retention
    • The buyer may want to retain part of the payment as security to ensure there are no undisclosed post completion liabilities. One way to overcome the potential risks posed to the buyer is to have the funds placed in Escrow, only to be released once the agreed terms between the parties have been fulfilled.

share this Article

Share on facebook
Share on twitter
Share on linkedin
Share on whatsapp
Share on email

Recent Articles