What is this page all about?

Learning the terms

This page is for you to learn some of the typical terms that are in purchase sale agreements or letters of intent.  As a seller the more comfortable you are with the definition and application of these terms and clauses the more confident and flexible you can be at the deal table.

When it comes to selling your business the more comfortable you are with the use of the terms on this page the better you can craft your perfect deal.

Term #1 Earn Out

Why is this Important

When selling a business a common term is an earn out clause.  What is an earn out?  It is a portion of the sale price being tied to the owner’s involvement or future performance of the business.

If bold claims are made to future performance that buyers find hard to accept they can tie a portion of the sale price to hitting those goals.

Earn outs are also used to close the gaps between a buyer and sellers views on valuation.

Learn the ins and outs of Earn Outs in this short video.

Term #2 Roll Over

Why is this Important

Roll overs are a way for the seller to continue to participate as an investor in the post close company.  I recommend discussing with your tax advisor how to include some roll over in the deal when selling to a financial buyer.

If you do a good job and select a quality private equity firm they will grow the business over the next three to five years.  While the initial sale of your business will likely be the primary liquidity event for you you get a second bite at the cherry if you leave some equity in the new business.

Beyond the potential tax benefits you also get access to one of the best performing asset classes available. Understand and do not overlook the roll over!

Term #3 Escrow

Why is this Important

Escrow is a very common clause in a purchase sale agreement to deal with any issues that can arise post sale regarding undisclosed liabilities.  Buyers will commonly request 10-15% of the sale price to be held in escrow to offset any post sale issues.

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