I’m Ready To Sell My Business – How Do I Get Paid?
Let’s say you have just sold your business. Congratulations! But then you think, how will I receive the money for it? In this post, I will outline the four main ways in which you can receive payment when selling your business.
- Cash in Full on Settlement
This is the most common payment method as it is straightforward, provides immediate liquidity, and allows for a clean break from the business.
You can also receive part of the payment in cash, with the remainder paid through one or more of the following three methods.
- Vendor Finance
Vendor finance is when you, as the seller, agree to receive part of the purchase price over time rather than in full at settlement. It opens up a wider pool of potential buyers, can increase the purchase price and also provides a steadier income stream. Vendor financing typically includes an interest rate charged to the buyer (commonly 5-10% per annum on the outstanding balance). As a seller, there are several things you can do to make vendor financing a little safer. Negotiate the highest upfront payment that you can, conduct due diligence on the buyer‘s financial capacity and creditworthiness before agreeing to vendor finance terms, and register a security interest over the buyer’s assets under the Personal Property Securities Act 2009 (Cth) (PPSA)
- Earn-Out
An earn-out is when part of the purchase price is not paid at settlement and is instead contingent upon the business achieving certain performance metrics after the sale. This is typically used when the buyer is uncertain whether the business will perform at a level that justifies the purchase price. Like vendor finance, earn-outs can facilitate deal completion because the parties can agree to proceed without resolving all valuation disputes upfront, and they reduce the buyer’s financial risk. For the seller, if the business performs well, then you can receive a higher price than what you initially hoped for. Common metrics to assess performance include revenue growth, client retention rates, and EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation).
- Full or Part Scrip
Scrip consideration is when you receive shares in the buyer’s company (or the merged entity) as payment for selling your business. This type of arrangement means the seller retains an ongoing ownership interest in the business or the acquiring company.
This option does not come without caveats. Share values can fluctuate, the shares may have limited liquidity (especially in private companies), and you will need to enter into a shareholders agreement governing your rights and obligations as a shareholder. However, it can be good if you do not feel comfortable parting with your business entirely.
If you are considering selling your business, please contact us for assistance. We can guide you through the process and help you choose the most appropriate payment structure for your circumstances.
DISCLAIMER: This article is for informational purposes only and does not constitute legal advice.