What Terms Should We Be Looking For?
There are so many variables, but the best case scenario is “Here is the cash”, then I am out of there. That is the least risk for you as the seller. But nine times out of ten that is not going to happen because a lot of the intellectual property in the business is caught up in you the owner. Even though you may have done your best to actually get it all out and systemise it, there will be a perception from the buyer that they need you there. They need you around for a while.
That may change after two or three months, but there are different scenarios. There could be an earn-out, where a portion of your payout is tied up with the future profits of the business. “We are paying you a million dollars. Here is $500,000 now and we will pay you the rest if the business hits these goals.”
You still have skin in the game. And it could be over whatever period of time. It could six months, two years, five years. It’s all negotiable.
Depending on the business that is buying you, you could get stocks, for instance. If you are being bought out by a company that is a listed company, they may give you a certain amount of cash and they may give you a certain value in shares. You are counting on the value of those shares increasing or not going down. Usually that will be on ice for a little while and again the term is negotiable.
They might say, “Here’s the shares and you can’t sell them for a year,” and that way you know you want the company to keep growing so you can increase your value as well. They still want your skin in the game.
On the other hand, sometimes people have this notion around holding on to a little bit of equity in the business. That may happen so that somebody might buy your business.
Say for instance, you are selling off to a private equity group, which is someone else we have not talked about yet. They have a very short time frame. With private equity usually, they say it’s a great opportunity with your business and they are going to grow it, usually three to five times in the next three to five years before they sell it.
That’s always the way it goes with private equity. Part of their deal might be that you will retain a small percentage.
That’s a really good outcome for you because you unlock the wealth that you created so you got a cash payout. Then you are still interested and you still got a little bit of skin in the game as far as the future is concerned.
Often they do not want you around though. They want you out because they are bringing in a different management style and different key people to be able to exponentially grow the business.
It is very difficult in that type of situation. So if you are in an earn-out, it’s often very difficult when you have been the boss. You have been calling the shots. It’s my way or the highway, so to speak. All of a sudden, you are answering to someone else and you have to start doing management reports that you are not used to doing.
Chop, chop. Otherwise, it will be chop, chop. It’s often very difficult to be in that position.
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