Setting up and agreeing to proper and reasonable payment terms is an essential part of the selling or acquisition process. The following questions are common for both buyer and seller when it comes to deal structuring, especially in regard to financing the transaction:
- What types of financing are available?
- What is seller financing?
- How are payments structured to promote post-closing co-operation and motivation for both parties?
- Are there contingencies to the payment of the full purchase price?
- Does client attrition affect the final purchase price?
Underlying virtually every acquisition is the assumption that the seller will offer some kind of financing to support the transaction. There are four primary types of seller financing, the last three of which include contingencies that may alter the final purchase price.
- A basic promissory note
- An adjustable or performance-based promissory note
- An earn-out arrangement
- A revenue sharing or fee-splitting agreement
Seller financing is less a matter of the sufficiency of a buyer’s cash reserves and more the basic payment structure technique that recognizes the importance of keeping the seller motivated to help with post-closing client retention. Post-closing seller motivation and support is critical in a transaction that involves a relationship-based business.