Earnouts or Sellers financing

searcher profile

May 29, 2018

by a searcher from Georgetown University - The McDonough School of Business in New York, NY, USA

Any thoughts on earnout structures? Thinking about presenting an offer structured as 25% down, 25% @ 1st year anniversary and 50% @ 2nd year anniversary. Deferred portion paid at valuation at time of payment. Hoping seller will be interested in capturing value from prospective growth while being able to retire as he wishes to.

9
3
304
Replies
3
commentor profile
Reply by a searcher
in Salt Lake City, UT, USA
From a buyer's perspective (assuming you have limited capital or can't get financing/investors on board) this seems like a great structure. From the seller's perspective it's just going to depend. They may be okay with the huge amount of risk (there's a chance they get paid 25% or their company's value), but more than likely they will want more up front. The other risky element for the seller is that if you tank the company it will be worth less and the seller gets penalized because you destroyed their company. At least that's how they're going to look at it. The downside for you is that you're incentivized to NOT grow the company because you pay more if you do. You can say it won't affect you but you might push certain sales off in order to keep the value down. That might also dissuade the seller from wanting to agree.
commentor profile
Reply by a searcher
in Sioux Falls, SD, USA
Mario, go for 100% seller financing right of the bat. Your low ball offer from the jump. However, remember the portion of the business the seller takes a note on is the portion he/she thinks is worth something. But if they do 100% seller finance then they think the business isn't worth a damn. The 100% you can also use commercial debt to the extent you've got the foundation for that.
commentor profile
+1 more reply.
Join the discussion