By Gary Pittsford, CFP®
President and CEO, Castle Wealth Advisors, LLC
Have you been thinking about selling your business, but you have decided to wait two or three more years until your gross income and net profits are higher? Because of the difficult economy that we had in 2008, most of you had lower gross sales and you had been forced to cut expenses in every division of your company. Now, in 2012, your company is much leaner and your sales have finally stabilized the last two years. If sales increase over the next two to three years your profitability will be excellent and that is what you are waiting on before you agree to sell the company.
This last year I received several phone calls from business owners who were talking to excellent qualified buyers, but they didn’t want to sell until the gross sales and profits were higher. Here is an idea that might fit the situation between the buyer and the seller. We call it the “earn out sales price.” Let’s assume that based upon current valuation, your company has a value of $1 million today. If the economy continues to recover there is a good chance that your company would be worth $1.5 million in four years.
Having an excellent buyer today, which may not be around four years from now, you might consider negotiating a sales price based upon the value today of $1 million and an additional earn out of some of the profits over the next two to three years. Negotiating the language is very important in this document. Keeping most of the expenses about the same, if the company earns an excellent profit the buyer would agree to share part of that profit with the seller. If the company does better the buyer and the seller both benefit, and if the company does not show higher profits then the buyer has paid a fair price for the company as it is today.
This allows the seller to sell the company to a buyer that they are comfortable with and at a negotiated price that will give them a higher total sales price over the next few years.
For the buyer this idea allows them to purchase a good company at a low price today and if the company does not do better then there will be no extra payments. If the company does very well and there is more profit than what they have shown in the past, then the buyer is only sharing some of that profitability over the length of the agreed terms. The buyer would only be paying more money if the profitability is there at the end of the year.
This earn out sales idea may allow some of you to sell your company to an excellent buyer and continue to receive some additional cash over the next two to three years which would help improve your total sales price.
Bringing together a qualified buyer and seller in good times is hard to do, but if you can find a buyer for your company that you are comfortable with, consider talking to them about a total sales price that might add up over the next two to three years.
Gary Pittsford, CFP®, is President and CEO of Castle Wealth Advisors, LLC. Castle specializes in helping families and closely held business owners with valuations, succession planning, estate and income tax analysis and retirement income security. Castle’s senior partners work with clients throughout the country in making logical decisions that help them fulfill their personal and business financial goals. For more information visit www.Castle3.com, call 1-888-849-9559 or e-mail Gary directly at .