I am thinking of selling my business to my manager (or to an outside buyer). Since he doesn't have any cash to put into the deal we're trying to structure our deal with some proven buyout options. What are some creative buyout options/deal structures for buyers/sellers of businesses? What variables do you base these buyouts on - gross sales, the adjusted net, etc.?
Your first priority needs to be security in any arrangement allowing someone to take over your business without a significant financial stake in the deal; that is, putting up a substantial amount of cash. After all, there may be people with the interest and funds to buy your business. If the manager owns a home or other property, or has other assets like stock market investments, that equity should be pledged to you, with a note backed by a security agreement. That way, you’re protected if unable to collect the full price you’ve agreed the business is worth.
And if the sale is planned for a few years from now, you may be able to arrange for an ESOP (Employee Stock Ownership Plan), a program by which the manager sets aside part of the proceeds of every paycheck to build a cash reserve ultimately used to pay part of the purchase price up front.
In its simplest form, a buyout program requires the purchaser to make a fixed payment on a regular schedule until the agreed on price, and any interest to be charged, are paid in full. More common are deals that call for the buyer to make payments equal to a certain percentage of discretionary earnings. A calculation of gross sales usually has little or no bearing on the particulars of the agreement. The two critical parts of a buyout agreement are a mutual understanding about the dollar value of the business (which is the total amount of principal the buyer will have to pay), and a clear and mutual understanding about what constitutes the owner’s discretionary earnings, from which the payments will be made. For example, if auto expenses are paid by the business, parties should agree whether the costs are necessary for the conduct of the business or are part of the owner’s discretionary income and available to pay to the seller.
Any seller agreeing to such a deal needs to be prepared to become a "partner" of the buyer. You should stay in touch with the buyer regarding performance of the business. A seller wants to step in, if the buyer has operating problems, and assist with managing the company in order to protect his/her investment. Also, the seller wants to keep an eye on the business books to verify that earnings are correctly calculated and that he or she is receiving the amount to which parties agreed.
Profile: Peter Siegel, MBA At BizBen.com: I am the Founder & President Of BizBen.com. I consult daily with intermediaries, business buyers, owner/sellers & advisors daily about buying and selling California small to mid-sized businesses. Contact me today about joining & utilizing BizBen, consultations, & advisory services. Phone Peter at 925-785-3118