Basically all buyers prefer additional purchase price, while basically all sellers have the opposite attitude. When it comes to down payments, the roles are reversed. Many, if not all, sellers claim exaggerated potential. Many business transactions contain some form of additional purchase price, seller charge back, earn-out, or deferred payment. Often, however, it is only a small and limited part of the business that takes place with these terms.
Let’s start by defining these terms
- Additional purchase price : is an addition to the original purchase price. Often, however, it is usually an offer with a purchase price that is partly conditional. However, for reasons that we will get into shortly, it should be seen as just an addition. If you were not satisfied with what you get as cash on closing, then you should decline the deal.
- Seller reverse : is a loan that the seller gives to the buyer. That in itself doesn’t have to be anything wrong, but it’s all about the conditions. It makes a big difference if only the company in question is used as collateral, or if the buyer personally guarantees the debt, combined with the buyer owning a property and/or other companies.
- Earn out : is a definition that can overlap both additional purchase price and sales charge back. An earn out is linked to a performance defined in advance, often turnover or profit. It is easier to justify linking an earn out to profit, but it is safer to link it to turnover.
- Shifted payment : is a definition where you usually use the expression instead, which is deferred payment. In practice, it is synonymous with sales charge.
- All these terms : are used by many synonymously with each other, which of course can be argued to be a bit careless. What really matters, however, are the conditions for the future payment, as well as the creditworthiness of the counter party.
If you are selling a business for the first time, you will receive many offers that include one of these definitions. As independent advisors, we are not ashamed to raise the issue early with the buyer, which also includes seeing the buyer’s proof of funds.
The percentage that can be additional purchase price, earn out or seller reverse differs of course, but since it is often full of problems, it is a sensible approach to limit it to a maximum of 20% – 25% and then only in the case of a bid that is above the unbiased valuation. In the case of a worse offer, which is below the unbiased valuation, our attitude is that you should demand 100% cash on closing.
