Selling your business
Deal Structures
The deal structure of the sale can be made up of multiple parts, usually referred to as deal consideration. At a high level, they consist of upfront, and deferred consideration.
Upfront Consideration
This is the cash or equivalent that the seller receives on completion of the deal.
Cash Payments
Cash can be created out of the amount available to the business. Extracting cash in this way is usually an efficient method to remove value from the business.
The buyer can also take out lending from other sources to build an initial cash payment. lending can be secured using the forms below;
- Asset-based lending – secured on the assets of the business
- Cashflow lending – also referred to as invoice financing, is secured on unpaid invoices
- Mortgages – if the business has any property which is currently unencumbered.
Share Capital
When another business acquires a business but gives shares of the acquiring business at the value of the acquired business to the sellers.
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Deferred Consideration
Deferred consideration refers to payments made over a longer period of time. These protect both parties if implemented correctly and can be made up of different methods as detailed below;
Earn Out
The previous owner receives payments based on the future performance of the business. This method works well when the seller wants to receice value from profits of the business and can be used to show belief in the profitability of the business moving forward. The owner usually remains as part of the business to ensure targets are met to achieve the earn out payments
Cash Payments
Deferred cash payments are a way to manage the debt hold of the business, the previous owner takes some of the value of the business as a future payment. The cash is raised by the business as either profit or future lending.
Holding Assets
A seller can also continue to hold assets from the business for future purchase, this works well when the business has properties included in the business, the property can be held back from the sale and secured using a purchase lease option, allowing the company to buy back the property at a later date.
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