Earn Out Financing

[jpanarra]

Hey everyone, JP Here.

My fiscal situation has improved drastically. I have 0 Credit card debt now and with a comfortable cushion saved up in the bank and I'm ready to use that leverage in my favor. So I started digging around SBA Loans, HELOC funds, then I came across something called Earn Out Financing.

So knowing this community is a massive resource for me so I came back on here to look for a thread that had to do with anything with Earn Out Financing. I was not able to find anything on here anywhere, so I figured I'll start this thread.

Before I dive in deeper, I want to try and explain it in the simplest terms as I understand.

An Earnout is where a buyer can put up a down payment on a business usually from a owner, takes ownership and uses the income of the business to pay off the remaining funds they owe over a fixed amount of time.

Obviously, a seller wants to sell their business, and for large mid-six-figure and seven-figure deals. Meaning that its much more likely to be open to earn-outs. What I'm reading is Seller financing is often interest-free, which is super beneficial for you a buyer.

I was wondering if there was anybody on this forum that had experienced a buy-out deal and how did the proceedings go. Only because I'm interested in exploring this route of leverage.

 

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[ljean]

You would likely need to have a existing relationship with a seller - its a big risk for them.

 

[jpanarra]

You would likely need to have a existing relationship with a seller - its a big risk for them.

That's what you would think.. What I'm reading is actually its much more commonplace for business owners that want to walk away for retirement that don't want to do anything with the business anymore.

It usually falls under niche industries and products.

Or the other thing would be the owner is a serial entrepreneur that cannot handle the load and doesn't want the business to collapse because another venture of theirs is even more so successful. (this would be the category you're thinking of and I would believe to be more commonplace).

 

[Kid]

Had no experience with Seller financing but i'm also interested in this form.
For me its quite good solution for a buyer that wants (or needs) to be active in bought business.

Example might be cost of digital services optimization.

When you use database as a service - it will cost around 10x more than custom database setup on own server (with all the headache of securing, optimizing, handling spikes in visits to site, redundancy).

And things like video hosting and serving - "hands off" video service is 4x more expensive than making it on your own and handling all video codecs, space, different frame-rates ,backups, etc.


I also see this way of selling as a better version of hiring employee.

Instead of hiring, managing and motivating employee, you get someone who has intrinsic motivation, can work as much and as hard as he can because its his or hers business now.

 

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