It’s certainly exciting when someone wants to buy your business. And there are lots of permutations on the way that transaction might happen.
It’s not uncommon for a purchase to be made via an exchange of shares. That is, the purchaser agrees a value for all your shares and swaps them for the same value in their shares. If their shares are traded on the stock market, then you have a market on which you can sell them, subject to any agreed restrictions. But beware; if they are not then you might be swapping one set of untradeable shares (yours) for another set (theirs).
You may also have your own investors who need to be persuaded that a sale right now is in their best interests. Their views will be pivotal, and their experience valuable.
Or the transaction could be all cash, or a combination of cash and shares. You will need to think carefully about this. Cash is available to spend now but doesn’t increase in value. Holding some of your acquirer’s shares might give you some upside later, or they might crash and burn leaving their shares worthless and you with a smaller pot.
What is common is the earn-out. This is where your purchaser agrees the value of your shares, but will give you a bit of their value now and a bit later. You may end up continuing to work for the business during your earn-out, which is designed to make sure your financial projections were accurate. The final amount you earn depends on those projections being achieved.
It’s like selling your house and getting, say, half the value now – then you work as the gardener and handyman, and if the roof hasn’t collapsed after six months you’ll get the rest of the purchase price.
Consider an earn-out carefully. If your purchaser is essentially keeping your business and the employees intact during your earn-out period then it can work. Negotiate an upside as well as the downside, because the financial results are not going to be exactly as predicted.
If your purchaser is absorbing your business into theirs and their systems and practices will be applied, I think the earn-out is more difficult because you’ve got many more parameters at play. You could stay for a few months, but limit any reduction in your final earn-out to an absolute minimum.
An earn-out can work – both financially and emotionally. It can be tough selling your business and walking away the day after the transaction is completed. An earn-out can also give you time to think about what’s next.
Comments