The simplest way to sell a business and usually the preferable way is to receive the payment up front in one lump sum.
However, depending on the size of the business and the financial resources of the buyer there are a range of other options as to how to pay the seller.
This article explores some other possibilities as to how to achieve a successful outcome.
Part cash and part vendor finance
The buyer may have a proportion of the purchase price in cash and may not qualify through traditional financing channels for a range of reasons, such as the equity that would be left in the business is not adequate for a financier to lend the money or there is inadequate security that could be provided.
Often in the circumstances mentioned above a seller will consider vendor finance which is simply where the party selling a business loans the buyer part of the purchase price.
It is important if a seller is considering vendor finance that it obtains adequate security to ensure payment from the buyer.
The various forms of security that are generally considered are:
- Mortgage of real property
- Personal Property Securities Register (PPSR)
- Personal guarantees from directors of a company
- Retention of title until the payment is made
- Registered charges over a company and its assets
- Rights to step into and take control of the business in the case of default
This can be a costly option and will require preparation of various security documents and often fees for registration.
Part cash and an earn out
In this scenario you receive part of the purchase upfront and subject to how the business performs receive a further payment/s over a period of time referred to as an earn out.
This is often used where a buyer is not sure of the future performance and whether the business will continue to operate at the pre purchase levels, especially in circumstances where the seller is no longer working in or associated with the business.
This can be a concern for the seller as they have no control over how the buyer will operate the business and further payments are directly linked to that.
This method also has the possibility of leading to disputes as to how the accounts are operated by the new owner and the manipulation of the accounting figures to show a worse financial situation than what is actually the case.
So, if you do want to go with an earn out arrangement, you need to make sure of the rules of that arrangement and how the profits are calculated is agreed up front and documented appropriately.
Getting scrip
This is commonly referred to as ‘scrip for scrip’ or ‘scrip for scrip rollover’
In this case the acquiring company offers its own shares (scrip) as consideration to the shareholders of the target company, instead of cash. This can also be done for a Trust.
The seller could receive part scrip or full scrip.
The seller will usually remain working in the business in these types of transactions.
There are strict rules for any company considering this and compliance with the Corporations Act 2001 and the Australian Tax office have to be factored into the transaction.
The benefit of this type of transaction is that it allows the seller to defer Capital Gains Tax (CGT) and delivers flexibility.
The disadvantage for the seller is that they may not be able to sell their shares easily unless listed on a stock exchange. Generally, as the seller you will be required to enter into a shareholder’s agreement with the buyer which could also limit your ability to sell your share and realise your capital.
How can FC Lawyers help if you’re selling your business?
At FC Lawyers, our experienced business and corporate team have assisted businesses in a range of sectors with their legal needs when selling a business.
We can advise you of the various options and work with your other professional advisors including your accountant to ensure the sale or purchase achieves a satisfactory outcome for all parties concerned.
If you’re looking at selling your business, contact our team to discuss how we can assist you through the process.
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