When selling a business, the deal structure is just as important as the purchase price. While many owners expect to receive the full value of their business at closing, it’s common for buyers to propose alternative structures, most notably, earnouts and seller financing. Understanding these mechanisms is essential to evaluating offers and protecting your long-term interests.
An earnout ties part of the purchase price to the company’s future performance. Instead of receiving all proceeds upfront, the seller is paid additional amounts over time if the business meets agreed-upon financial targets. Earnouts are often used when there’s a gap between what the seller believes the business is worth and what the buyer is willing to pay today. While earnouts can help bridge valuation differences, they also introduce uncertainty, as payments depend on future results that the seller may no longer fully control. Careful negotiation of performance metrics, reporting standards, and management responsibilities is key to ensuring fairness.
Seller financing, on the other hand, occurs when the seller provides a loan to the buyer to cover part of the purchase price. The buyer makes payments over time, typically with interest, until the balance is repaid. This can expand the pool of potential buyers and make a deal possible in cases where traditional financing is limited. However, seller financing also carries risk; if the buyer struggles financially, the seller may not receive the full repayment. Strong contractual protections and a clear understanding of repayment terms are essential.
Both earnouts and seller financing can be powerful tools in getting deals across the finish line, but they require careful consideration. For sellers, the decision often comes down to balancing the desire for a higher purchase price with the need for certainty and security. With experienced advisors guiding the negotiation, these structures can be tailored to protect the seller’s interests while also meeting buyer needs.
Aberdeen Advisors is a boutique mergers and acquisitions firm. Our dedicated team is committed to helping business owners successfully navigate the intricacies of an ownership transition. Additionally, our team is made up of former business owners and C-suite executives who have run and sold companies. We pride ourselves on a successful track record of shepherding business owners through the M&A process to ensure a successful outcome.