The way payments are made by the business buyer to the seller will be largely determined by the way the deal is structured. Common deal structures typically include a share sale, asset sale, merger, management buyout (MBO) or earn-out agreement.
Share sale - The shares of a business are sold to another party in whole or part. Payment will be made for the shares by the incoming shareholder to the outgoing shareholder
Asset sale - The buyer will pay for company assets that they have handpicked, including any liabilities that they wish to take on
Merger and acquisition (M&A) - Payment is often made through a combination of cash and equity for the purchase of shares and company assets, although this will vary based on the type of merger
Management buyout (MBO) – An MBO is often funded through a combination of personal loans, finance and equity pooled together by company employees. The remaining balance will typically be made in instalments to the business seller
Earn-out agreement – An earn-out clause involves an agreement between the buyer and seller for a lump sum to follow when the business hits a certain milestone. The milestones are agreed by both parties, such as a profit target or when the business hits a certain value
There are many factors that are taken into consideration when deciding on payment structure, including how the purchase is funded. For a payment arrangement to work, both parties must support the proposal and payments must be manageable, affordable, and feasible over the long term if the balance is spread over time.