When you are selling your business, you are typically trying to get the highest value for that business.  The biggest impediment to getting full value for your business is the risk, whether real or perceived, that the buyer feels exists with buying your business.

As a business broker in the NY CT area we experience this during almost every sale.  They buyer is determined to pay less value for the business, due to their idea of the riskiness of future earnings of the busienss.  The business seller understands the risk, and is confident the risks are minor.  How does the business seller mitigate the risk for his buyer, or guarantee that his business for sale will not fail?

This is a very complex question, and not one that we can easily answer in a couple of paragraphs.  The business might be running fine, and would be running fine well into the future, but the new owner that just bought the business is now in control, and might unwittingly make decisions that decrease revenue and profits.  How can the exsisting business owner guarantee anything when the do not have control?  There are two methods many business sellers use.

One - partition out the expected revenue/earnings of the business, so that the existing owner cannot be penalized too much for bad decisions which they have no control over.  In other words, if the new owner spends a considerable amount on a new product that flops, but the traditional business continues to crank along, that should not effect any earnout or future payments to a large degree.  By compartmentalizing how the earnout is computed will negate a tremendous detraction.

Two - Share on the upside.  If you as a business seller are expected to take on risk on a potential downturn in business, you must also share in any upside the business experieinces during that time.  The business seller must set a benchmark of standard expenses, and get paid for profits (or revenue) that exceeds those benchmarks.  Certainly the owner of the business for sale will not receive 100% of those additional earnings, but should share in some of the profits.

We mentioned these are complex agreements, and there are.  It is very important to write them out completely, and allow for contingencies or unforeseen events.  In the end, this will help the business owner receive maximum value for their business for sale because it mitigates some of the risk for the buyer.

www.PrincetonCapitalllc.com