When buying and selling a business you need to establish how the buyer will pay for the business. In the majority of cases, the buyer will pay cash for the business, but this is not necessarily the case. Options for payment include:
- paying the full amount in cash
- paying the part of the money in cash and the rest in bonds
- carrying out an asset swap orÂ
- offering shares in another company to the seller.Â
One potential point of contention between the parties is when the seller receives his money. The buyer may want some form of security in relation to the cash flow of the business and to protect his position, while the seller would want to get all his money as quickly as possible. The parties would therefore need to agree on when the seller gets paid. Several different payment options exist:
- 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.Â
- 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.Â
- 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 sellerÂs tax liabilities.
- 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.
- 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.
To avoid any delays in the transaction, the type of payment and payment method should be agreed at the outset.