How do you value your business when you're selling it?  In recent years there seems to be more significant differences in expectation of valuation between buyer and seller, and increasingly the Earn-out clause has been used as an appropriate way to bridge this gap. The clause basically retains interest and motivation for the seller by holding back a portion of the sale price until certain performance criteria are met, and minimises risk to the buyer of overpaying for a business that doesn’t perform as well as its previous owners say it will. If it is planned and executed well then the buyer can gain more than originally envisaged, but it is full of risk for the selling entrepreneur and conflicts are almost inevitable. So what’s the problem? You might base the sale price of the business on an assumed level of financial performance over the next 24 months, but the seller is cautious and insists on part of the value being deferred and wrapped up into an Earn-out clause. The seller … [Read more...]