When you receive offers for the sale of your company, you will also receive suggestions about different payment methods. The method you choose will have a huge impact on the final price of your business.
A buyer might propose to pay all or part of the price in his company’s shares; another might want to pay one part upon closing the deal and the other part over the following years according to the company’s results. Some buyers might even suggest paying in installments not based on results.
Vendor finance
Sometimes the buyer is not able to get financing or does not have enough liquidity and he asks you to finance the transaction (vendor finance). This way, he can pay you in installments.
It is obvious that the money comes from the results of the actual company, but this should not matter to you. However, it is important to understand that there is the risk that he will not be able to pay. It is important to note that, it is crucial to establish clauses that will give the company back to you if this is ever the case.
Paying in installments
Paying in installments is very common in service companies. Buyers are usually worried that the company’s client portfolio will go along with the business owner. By paying in installments, the buyer can guarantee a transition that will allow him to get to grips with the portfolio and build trust with clients while the previous owners are still linked to the company.
Exchanging shares
In others cases, the buyer might suggest a merger via exchanging shares.
If the buyer’s company is public, it will be more profitable for him to pay with the company’s own stocks. In these cases, they will offer to pay you more than if they were paying with money, and you should evaluate the quality of the buyer’s stocks. Are they overvalued? What chance is there that they will lose value? Only accept this offer if you have faith in the future of the company that is buying yours.
If the stocks are a bit illiquid, you can agree on a repurchasing of part or all of the stocks used in the deal within a specified period.
Combination of payment methods
Other times, the buyer’s company is not capable of getting more debt and so he pays for everything with a proposition of a combination of stocks and money. This is also possible.
Sale of company vs assets and liabilities
You should also define if the transaction is the sale of your company or the sale of assets and liabilities.
A sale of assets and liabilities is a cleaner transaction that usually interests the buyer because he does not have to take on the company’s past responsibilities, but it could affect you negatively; for example, tax is higher, so it is a good idea to be aware of its impact on the final price.
Negotiation
During the discussion, many topics are brought up. Even price has many faces, and you should understand the implications of the different methods of payment.
Mergers and Acquisitions advisors are specialists in negotiation. During the negotiating stage, a lot of the value that you will reap from your business is created or destroyed. Our clients often hire us just for this negotiating period, when they have received an offer to buy their company.
This article was written by Enrique Quemada, Chairman of ONEtoONE Corporate Finance Group. Book: How to Maximize the price of my company.
You might also be interested in VALUE, WORTH, AND COMPANY SALE STRATEGY.
