At Amazing Exits, our focus is on sellers getting the best deal possible when selling their Amazon business. Most business owners who are ready to sell have fielded dozens of offers by now. They’ve seen offers that include holdbacks, earn-outs, and plain cash.
With so many types of deals on offer, it can be difficult to parse out what the end result of accepting a particular deal would be.
In a recent interview with Joe Valley, author of The EXITpreneur’s Playbook, we discussed deal structure – discussing how aggregators can structure a deal that gives them what Joe calls an “ignorance discount.”
Learn about Deal Structures
If you’ve gotten more than one offer, you have likely seen at least a few different deal structures. There are seven basic types of deal structures. These can be mixed and matched, or the offer may contain one particular type of deal. These structures include:
- Seller Notes
- Stability Payments
- Rolling Equity
- Inventory Notes
We discussed several of these deal types in the podcast. However, I wanted to talk about one deal type in particular in this article because it illustrates how a savvy owner/operator can get a great deal – and how easy it is to leave money on the table.
The deal type is Stability Payments.
Essentially, a stability payment is a percentage of a cash deal that is held in escrow by the buyer for a specified period (usually 12 months). This amount (let’s say 20% of the purchase price) will be released to the seller if the buyer sees a year’s revenue within at least 90% of the revenue at closing. So, say you made $100,000 a year, the seller would have to see revenue of at least $90,000 in the following year.
BUT, if the buyer has a revenue of $89,999.99 in that year, you forfeit that stability payment. Completely. You get 0%.
If you blindly took that deal and the buyer made below 90% in revenues during that following year, then you left a lot of money on the table. However, if you spoke with a professional beforehand and gained advice, you would have asked for some variability in the stability payment. For example, you could ask for variations like:
30% of purchase price if buyer makes 100% of the past year’s revenue.
25% of purchase price if buyer makes 95-99.9% of the past year’s revenue.
20% of purchase price if buyer makes 90-94.99% of the past year’s revenue.
15% of purchase price if buyer makes 85-89.9% of the past year’s revenue.
10% of purchase price if buyer makes 80-84.9% of the past year’s revenue.
5% of purchase price if buyer makes 75-79.9% of the past year’s revenue.
Including variables and asking for a range in a professional manner opens the floor for negotiations and nets you a better deal. However, you have to understand the deal structures offered to make reasonable counter offers and to know when you should shop a deal around to see if you can get a better offer elsewhere.
Why Entrepreneurs Don’t Like Exit Planning
Exit planning is a difficult topic for entrepreneurs to discuss. They don’t want to discuss leaving a company before they are ready to actually leave the company. They don’t want to feel obligated to sign an engagement letter and sell when they aren’t ready.
It may be better to look at exit planning as exit training. You are not currently planning to sell your company right this second. We understand that. But you will one day be ready to exit and move on from your business. Now is the best time to begin strategizing to ensure your business is at its peak when you sell.
If you are considering exiting at some point in the next year or two, be sure to get your Freedom Score and find out how much more you need to understand and do to create a successful exit. This assessment will help you gain the knowledge you need to calculate your next move.
Finally, if you are ready to exit sooner rather than later, the team here at Amazing Exits is here for you. Schedule a call and talk with us about your business – and about your ideal exit.