The seller says your offer is too low. Now what?

Picture this:

You’re about to close your first acquisition.

So far, it’s the perfect deal… except for one big problem:

You and the seller are still miles apart on the price!

The seller thinks their business has huge growth potential, and is worth a higher valuation.

You’re not so sure.

You do believe the business will be extremely profitable, and want to make this deal work.

But you don’t want to overpay for potential upside that might not happen.

Now you’re at a standstill, and it feels like the deal might fall apart at the last minute.

This situation is incredibly common.

The solution?

Earnouts.

This is a deal structure designed to help you find a middle ground.

With earnouts, you’ll only pay that extra portion of the purchase price after the business realizes its full value!

Let’s say the seller wants 20% more than what you’re offering.

In this case, you could tell them:

“I’ll buy your business today at the lower price. And if it performs well over the next few years, I’ll pay you that extra 20%.”

This protects you from overpaying, and the seller gets a shot at the price they want.

And the seller has skin in the game, because the business needs to hit specific performance metrics before they get paid.

They’re incentivized to make sure the handoff goes smoothly, and help you any way they can.

(Most earnouts are tied to the seller staying on board in a management position, for this reason.)

One big caveat is:

SBA guidelines do not allow earnouts!

So if you’re using an SBA 7(a) loan, you’ll have to take a different route.

Instead, you can use:

A forgivable seller note.

Say you’re buying an accounting firm for $1 million, with a 10% forgivable seller note.

That means $100k of that $1 million purchase price is forgivable (you don’t pay) based on certain metrics.

You can tell the seller:

“One year from now, if this business does 95% or less of the previous year’s revenue, then I no longer owe you that $100k.”

This is one of my favorite strategies, because it gives the seller all the same incentives as earnouts.

And unlike some earnout structures, no money is put into escrow!

If you’re new to the acquisition game, the idea of making big deals like this might seem daunting.

But it doesn’t have to be.

If you’re a motivated individual making over 6 figures, then you already have what it takes to get started.

The only thing you’re missing is the knowledge of how to structure and finance your first deal.

Interested in learning how to buy profitable businesses for $0 (or very little) out of pocket, or invest passively into an acquisition as a silent partner?

Fill out our 2-minute Investor Survey, and we’ll send more info your way.

Catch you in the next issue of the Acquisition Ace Newsletter!