Just a few short months ago the economic climate meant that the private business market favoured the buyer and as a result there were business owners signing up for sale deals that perhaps they would’ve been better walking away from…but didn’t.

Fast forward a few months and things have improved significantly. Business owners who are still considering selling are certainly not so desperate and are taking the time to consider their options and any offers on the table, much more carefully.

Consider for example the earn-out clause.

The original idea of the earn-out was to motivate the seller to hand over the business in good condition while providing the purchaser with an opportunity to ensure that they only paid for the goodwill that transferred over with the business.

Beware of buyers who use the earn-out as a means of prolonging the purchase period.

There are two reasons they might do this:

1. To assist them in finding time to raise the purchase capital

2. To reduce the price/risk equation by having the current owner work through a transfer period.

Business vendors need to protect themselves from some major risks associated with the above, such as:

• The purchaser being unable to raise the capital to complete the transaction. The vendor needs to ensure they have some form of reliable security and the ability to unwind the sale without any cost to them.

• The seller needs to consider the tax implications and perhaps the timing of the overall transaction to ensure it is contained within a single tax year.

Want to know more? Talk to our team and be fully aware before you sign on any dotted line.