By: Aristata Financial

When business owners think about selling their company, the first question is often, “What’s my business worth?” While valuation is important, the purchase price is only one piece of the transaction. The purchase price may grab the headlines, but the structure of the deal often determines how much an owner actually takes home and what responsibilities continue after closing. Understanding a few common deal terms before entering the market can help owners make more informed decisions and avoid surprises during negotiations.

Earnouts

An earnout allows a portion of the purchase price to be paid after closing if the business achieves agreed upon performance goals. Buyers often use earnouts when future growth is uncertain or when they want the seller to remain invested in the success of the business. While an earnout can increase the total value of a transaction, it also shifts some of the risk to the seller because a portion of the proceeds depends on future results. Before agreeing to an earnout, owners should understand how performance will be measured and how much influence they will have over the business after the sale.

Working Capital Adjustments

Many purchase agreements include a working capital adjustment that compares the business’s working capital at closing to an agreed target. The purpose is to ensure the buyer receives a business that has the resources needed to continue operating normally after the transaction. If working capital falls below the target, the purchase price may be reduced. Owners are often surprised by this adjustment because it can affect the final proceeds even after a purchase price has been negotiated. Preparing financial records well before a sale can help reduce unexpected adjustments during closing.

Representations and Warranties

Representations and warranties are statements the seller makes about the condition of the business at closing. They cover areas like the accuracy of the financial statements, legal compliance, ownership of assets, and any known liabilities. If one of those statements later proves to be inaccurate, the seller may have financial responsibility for the resulting loss. That is why buyers spend so much time on due diligence and why sellers should begin preparing well before going to market. In today’s market, many transactions also include Representations and Warranties Insurance, which can shift much of that risk to a third-party insurance carrier and reduce the likelihood of disputes between the buyer and seller after closing.

Holdbacks and Escrow Accounts

Even when Representations and Warranties Insurance is part of the transaction, buyers may still require a portion of the purchase price to be held in escrow for a period after closing. Those funds provide an additional source of recovery if certain claims arise that are not covered by the insurance policy or fall within the seller’s responsibility under the purchase agreement. The amount held back, the length of the escrow period, and the types of claims that can be made are all negotiated as part of the transaction. Understanding those provisions ahead of time can help owners avoid surprises when they compare the headline purchase price to the proceeds they actually receive at closing.

A successful business sale is about more than reaching an attractive valuation. The terms of the agreement often have just as much impact on the outcome as the purchase price itself. That is why preparation extends beyond improving the business itself. It also means assembling the right team to guide each stage of the transaction. Attorneys, CPAs, and investment bankers each play a critical role in protecting the owner’s interests. At Aristata, we serve as the quarterback throughout that process, helping coordinate the right professionals so every aspect of the transaction works together in support of the owner’s personal, financial, and business goals.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Aristata Financial and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC, marketed as Aristata Financial. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Aristata Financial is not a registered broker/dealer and is independent of Raymond James Financial Services, Inc.