As business owners are approached about selling their business, they should carefully consider the purchase offers that are presented to them to determine if the terms are advisable. For instance, a key issue is often the portion of the purchase price, if any, that is contingent upon the achievement of certain financial milestones by the purchased business after the closing. This portion of the purchase price, generally known as “earn-out payments,” will typically only be paid if the purchased business achieves certain pre-set financial figures during one or more predetermined periods following the closing.
Because these earn-out payments are dependent on the purchaser’s operation of the purchased business after the closing (frequently with little or no input from the selling party), the purchased business often fails to achieve the required financial milestones and the selling party does not receive the earn-out payments. Accordingly, where possible, business owners should seek to limit the portion of the purchase price, if any, that will be paid pursuant to an earn-out payment and negotiate fair financial milestones that must be achieved in order for such earn-out payments to become due.
Our firm’s Business & Finance Department has developed an extensive, dedicated practice representing clients in connection with the purchase or sale of a business. In such a capacity, we regularly advise sellers about potential sale offers and associated risks. If you are a business owner who has received or is expecting a sale offer, contact the Chair of our Business & Finance Department, Paul Rushton (prushton@rjglaw.com), or one of the other attorneys in our Business & Finance Department to learn more about these services.