Earnouts Not Always Appropriate
"Question: What are some creative ways to structure a purchase offer on a business? I'm trying to fund the gap between my savings, a Small Business Administration loan and the seller's asking price. I realize the seller can take back a note. I've also toyed with an earn-out. -- John, Tucson, Ariz.
John: In a slow economy, it can be tough for buyer and seller to strike a deal and finance a purchase. In some cases, an earn-out can be a satisfying compromise. Typically, an earn-out is an arrangement in which the buyer pays a portion of the sales price at the closing, with future payments to come. The future payments generally depend upon meeting sales targets or other milestones.
An earn-out may sweeten the pot for the seller, who can take advantage of the business's future upside. Further, an earn-out also can help the buyer, who may be strapped for cash, as in your case.
But consultants who work in that field caution that an earn-out becomes a form of partnership. It's not appropriate for every business acquisition... "
Read more in this StartupJournal article.
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