It’s understandable that owners would want to reap the rewards of recently signed clients. Often times, clients don’t learn about your company one day and then hire you the next. It can take years of getting to know each other, office visits, travel, follow up calls, and most importantly, perseverance, before a client will trust you enough to hire your firm. Not to mention everything that went into building your company’s reputation, all of which directly and indirectly goes into the decision to hire your company.
The fact is, at any given time, most successful businesses have a number of hot prospects that appear likely to sign up. Even if a client is already under contract, it may take months before that contract generates revenue. So when circumstances dictate that it’s time to sell, owners are often puzzled about whether the timing is truly right. And they question whether they should move forward with a sale today or delay it until revenue starts flowing from recently signed clients and the hot prospects.
Don’t make the mistake of delaying a sale for the wrong reasons! There are ways to get paid for seeds you’ve already planted.
So how can I get paid for new clients and hot prospects?
Buyers often seek to pay for the business you’ve created and the earnings stream that will be delivered to them at the time the deal is closed. However, because buyers are typically attracted to growing businesses (which may be one of the key selling points to your business), they may be willing to sweeten the pot for you. In that case, a "structured" deal may be used. This means that, in addition to possible cash paid upon closing, incentive-based payments may be paid to the seller if the company achieves performance hurdles over a designated period of time, usually 1-3 years. Referred to as an "earn-out" component, in some deals we’ve facilitated, it has actually doubled the amount our clients have made from the sale. An earn-out component gives owners an opportunity to bank a considerable amount of the value in their business today and still have another substantial payday down the road. This allows owners to feel comfortable that they are being paid for their established client base as well as new and soon-to-be clients.
Is that risky?
There are risks associated with earn-outs. The main risk is that sellers may not "hit their numbers" and achieve the payout they hoped for. Another concern is that after a sale, an owner may not have the same level of control within the business, and that meeting those performance hurdles may be out of their hands. A third concern is that the buyer may increase the expenses incurred by the business, thereby reducing the seller’s ability to achieve the earn-out. That said, a seller needs to fully understand what his or her role and responsibilities will be post-sale and how the buyer intends to operate the business. If the seller is comfortable with this and has confidence in the growth of the business, then the risk is greatly minimized and the reward can be significant.
What’s wrong with waiting?
We’ve talked to too many owners who have elected to wait it out and delay selling until prospects or recently-signed clients begin to generate revenue, only to find out that the client they expected to sign went to a competitor, or they lost a client, or their top manager left all of which can dramatically affect the sale-ability of a business. Owners can always make a case that there are better things around the corner, but in our experience, the risks associated with waiting are often not worth it. The simple fact is, any number of things can happen to your business in this "waiting period." Businesses do not operate in a static environment – rather they are constantly changing and reacting. To put it mildly, things happen!
The Bottom Line: If it’s time to sell, it’s time to sell. Hire an experienced advisor who understands your business and your goals and can structure a deal that works for you.
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