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The Ticking Time Bomb Lurking Inside The Sale Of Most Businesses
Deal structures like the ones mentioned in this article are high-risk propositions for business sellers and most common when business owners try to sell their businesses themselves. While most K&A transactions have some seller-financing (what the author calls “vendor take back”) for good reasons, that should be a much lower percentage of the selling price (25% or less in most cases). Having a professional intermediary involved who can engage multiple financially capable buyer prospects increases the probability of achieving a more favorable transaction structure.
From Forbes.com:
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The Ticking Time Bomb Lurking Inside The Sale Of Most Businesses
When you sell your company, you’ll want a cash offer but a buyer will want to give you as little cash as possible.
One of the mechanisms acquirers use to minimize your cash at closing is called a “vendor take back” which involves you agreeing to be paid over time. The buyer usually uses the profits from running your business to write you a check each month.
In most agreements, you also earn a little interest. These arrangements can work out well provided the new owner makes good on their payments. In the event the new owner doesn’t make their payments, you can sue to get your business back, albeit in much worse shape than when you sold it.
It all sounds reasonable until you realize our imperfect legal system makes it expensive and time-consuming to actually enforce the agreement. You can spend months or years in court trying to get paid while the business you “sold” rots.
It would be easy to dig your heels in and say you’ll only sell for cash, but unless you have the cure for baldness or a few million a year in profits, the chances are you will have some portion of your sale proceeds deferred in a vendor take back. The goal should be to maximize your cash at closing while ensuring your vendor take back is structured so that late or non-payment has consequences beyond just the ultimate legal hammer of suing to get your business back.
All Occasion Transportation
Eric Weiner, for example, started All Occasion Transportation in college and, by the time he turned 35, his company was grossing more than $3MM a year. That’s when Weiner decided he wanted out.
Weiner found a buyer and agreed to accept half of his proceeds up front with the balance paid in the form of a five-year consulting contract guaranteed by the business. In other words, if Weiner didn’t get his consulting money, his recourse was to sue and, if successful, he would get his business back.
In the beginning, the agreement worked out well. The new owner of All Occasion Transportation valued Weiner’s consulting time and used this to help smooth the transition. As time went on, the new owner needed Weiner less and his presence in the company was becoming an impediment for the new owner. They agreed that Weiner would stay home and be on call for the balance of his five-year contract.
According to Weiner, that’s when the payments started to slow down. Weiner felt the new owner didn’t want to pay for consulting he wasn’t receiving, but Weiner argued that he was ready and able to consult and that it was the new owner’s choice not to have him come in every day.
Weiner knew that if the payments dried up all together he could sue, but he did not want his business back. He had turned a page in his mind and didn’t want to go back to running the company again.
In the end, Weiner got his money, but it wasn’t easy.
When I interviewed Weiner for Built to Sell Radio, I asked him what he would do differently if he could sell his business all over again and he said he would have put a set of “sticks and carrots” in his five-year consulting contract. The carrots would be benefits the new owner would have enjoyed in return for paying the consulting contract off sooner and the sticks would have been fees and extra interest the buyer would have been on the hook for in the event a payment was missed or late.
During the interview, Weiner also reveals his principal mistake in selling: not running his business like a company that could be acquired. Maximize the cash you get at closing by creating a business that would be attractive to a buyer. See how an acquirer would evaluate your business by getting your Value Builder Score now.
I hope you get an all-cash offer for your business, but, if you don’t, make sure your vendor take back includes some consequences for your buyer if they wobble.
