Selling your business is a major life decision that often follows many years of hard work. For this reason, you may not feel like ending your connection with the business straight away once it has sold.
Retaining a position in a business under these circumstances is not unusual, and a handover period is commonly agreed between the buyer and the seller during negotiations. This period may be several months or more and is designed to ease the transfer of ownership.
Can you stay on in the business after the handover period?
The handover period is an important part of buying and selling a business and ensures a smooth transfer. The period typically involves training the new owner where necessary and then being available to offer assistance for a pre-determined timescale.
On a personal level, however, you may have decided during the negotiation stage of the sale that you want to stay in the business for a longer period of time. So how do you keep working in your business once it is sold? A common way to retain a position is via an earn-out agreement.
What is an earn-out agreement?
An earn-out agreement may be an option during the negotiations on price if your buyer perceives the value of your business to be lower than you put forward. It is a provision that facilitates a positive sale outcome regardless of these differing perceptions.
The agreement records future financial or performance targets that have been agreed between yourself and the purchaser, and that need to be met by the business within a certain timeframe.
The additional payment to you is contingent on the business reaching these targets, so they act as an incentive to boost the performance or financial achievements of your former business.
- Previous sales and acquisitions experience
- Sector specialisms and average success rate
- Sales value expectations and growth potential
Benefits of staying in the business under an earn-out agreement
You achieve your financial goals from selling your business
A carefully drafted earn-out agreement allows you to reach your financial objectives from the sale and prevents a potential collapse of the transaction due to differing opinions on value. You also retain some influence on your business’s performance going forward and can play a major part in its success once the initial handover period is complete.
An earn-out agreement offers peace of mind to the buyer
Your buyer knows that the payment is contingent on important targets being met, and these can propel their new business forward. This not only offers reassurance that they will not be paying an amount they consider excessive, but also provides them with a hugely positive start as the new owner.
Seek professional guidance on earn-out agreements
It is crucial to obtain professional help in negotiating and drafting an earn-out agreement so your rights to retain a position in your business after selling are protected. We can explain more about how you can work in your business when ownership has transferred.
Please get in touch with one of the team at Selling My Business to arrange a free, same-day consultation. We are highly experienced business transfer agents and work from offices around the country.