Factoring pending contracts into purchase price
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Question:
Here's my dilemma: I'm looking at a business that's been around for 18 months. There are three huge pending contracts that the seller says will come in over the next 12 months. They are factoring these into their asking price and won't budge. It's a great business but if those three don't materialize how can I protect myself?
Answer:
Present two offers: one based upon the hard data of what the business is like today and a second whereby you'll pay more based upon the value of the new business in the form of an earnout. However, the "premium" has to be weighed against who will do the work to secure the business. If the seller will remain active to get the new business then they should receive appropriate compensation but if you're going to do all of the work then they should only be rewarded with a portion of it. Likewise, if the so-called new business is imminent and can soon be realized, then the seller's percentage can be adjusted accordingly.
When all is said and done, it's OK to pay for "blue sky" but you cannot do so until you see for yourself that the sun is shining!
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Richard Parker author of: How To Buy A Good Business At A Great Price(TM), the most widely used reference resource and strategy guide for buying a business. He has purchased ten businesses in his career and has helped thousands of prospective buyers worldwide learn how to buy the right business for sale. He is also founder and President of Diomo Corporation - The Business Buyer Resource Center. Richard Parker is also the author of BizQuest's Business for Sale Blog |