| The need to use seller finance when trying to sell | | | | earn out basically is an agreement that the seller |
| your privately held company has come back into | | | | will receive a portion of the sale price based on |
| vogue due to the lack of third party finance being | | | | the sales or profit achievements of the business |
| readily available. Some techniques less known and | | | | in the future. This can be attractive to both |
| used, however, are available but require a clear | | | | parties where it is clear the business will grow |
| understanding between the seller and buyer and | | | | once the buyer and seller come together. Some |
| may then need good legal agreements to clarify, | | | | buyers like to use an earn out as an incentive to |
| protect and define the responsibilities of each of | | | | the seller to make sure the business transitions |
| the parties. Here are five options both a seller and | | | | cleanly to the buyer. This can be difficult to |
| buyer may want to consider. | | | | negotiate; especially if the seller has little to no |
| Option One: Allow the buyer to assume the sellers | | | | control over the buyer and the operation of their |
| credit. Both parties need to be clear on their roles | | | | business and its employees. |
| and responsibilities, but if the buyer is able to run | | | | Option Four: If a business has a large amount of |
| the business and continue to buy all inventory or | | | | inventory that the seller owns outright, the use of |
| other items the seller always bought and paid so | | | | a consignment sale for this part of the transaction |
| they earn a high credit rating, this can make the | | | | may be useful. Under this scenario, the seller |
| transition of the business easier to the buyer. If | | | | retains title to the inventory but allows the buyer |
| this method of financing is considered, an | | | | to sell it in the business and pay the seller for the |
| agreement should include a separate | | | | inventory as it gets sold. This saves the buyer |
| indemnification clause between the seller and the | | | | having to get inventory from other businesses |
| buyer making the debt the ultimate responsibility | | | | while it allows the seller to get his money from |
| of the buyer. Using a good attorney is best to | | | | the inventory and be exposed to the market. |
| prepare this legal document. | | | | Option Five: A very common option when selling a |
| Option Two: A similar idea to the one above but | | | | business that also includes real estate owned by |
| of the buyer assuming the sellers credit, the | | | | the seller is for the buyer to lease the real estate |
| buyer is allowed to assume capital notes and | | | | from the seller for a period of time and have the |
| leases. The seller is allowing his good credit to | | | | first right of refusal to buy the real estate if at |
| again be exposed to future decisions of the | | | | some point the seller wishes to sell. |
| buyer, but can help the buyer to build their credit | | | | Seller finance does not have to be restricted to |
| worthiness. | | | | purely a seller note on the transaction. A seller |
| Option Three: A popular approach where the seller | | | | can be used to receiving many business 'perks' |
| of the business has conceived an idea or the | | | | they have enjoyed from owning and operating |
| business would experience strong growth by | | | | their business. Allowing the seller to continue |
| either a capital injection from a buyer or merging | | | | enjoying those 'perks' can be a good strategy |
| with a much strong business is an earn out. An | | | | when buying a business. |