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Selling? Be Open to an Earnout

 Selling your business or considering it? Here’s a great explanation about earnouts from a CFO.com article entitled, “The Ins and Outs of Earnouts”.

“The sellers … may not want to sell… if the price is based on operating performance they believe is only temporarily depressed in the wake of the financial meltdown. Or they may be hesitant to sell based solely on historical performance when their businesses are in high-growth industries. 

Buyers, however, want to buy on proven performance and not speculative future performance.  This presents a classic situation: a buyer wanting to buy for less negotiating with a seller wanting to sell for more.  When buyers and sellers cannot agree on the valuation, a way to bridge this gap is through an earnout. 

An earnout is a contingent pricing mechanism. In an earnout, a portion of the purchase price is calculated by using the performance of the selling company over a period of time after the closing of the sales transaction.  It rewards the seller only if the future performance actually matches the current projections of future performance.

Further, it allows a seller to exit its current investment without forfeiting the ability to share in its future growth.  It also protects the buyer from overpaying if a seller’s projections are overly optimistic.  In many ways, the earnout aligns the financial incentives of both the buyer and the seller.”

Read all of The Ins and Outs of Earnouts.

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About Tiffany C. Wright

Hi! I,Tiffany C. Wright, am the author of the ebook, "Help! I Need Money for My Business Now!!" and the book "Solving the Capital Equation: Financing Solutions for Small Businesses", available on Amazon. I am the president of Toca Family Business Services, a short-term & project-based interim management & strategic and financial advisory firm, located in Atlanta, Georgia. In the past five years I've helped small and medium companies restructure and obtain over $31 Million in financing and a similar amount in purchase orders and contracts. I have an MBA in Finance and Entrepreneurial Management from the Wharton School of Business at the University of Pennsylvania and a B.S. in Industrial and Systems Engineering from The Ohio State University. Personal: I enjoy investing. I am a prodigious reader of everything from business books, magazines, and newspapers to horror and popular fiction. I read 4-6 books per month. I also love to travel. I've been to 33 countries on 5 continents and lived in Japan for 2.5 years and aim for a foreign locale twice a year. I am also an athlete and run track on the Master's Circuit. The highlight was placing 7th in my age group in the 2007 World Master's Track and Field Championships in Italy.

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The Resourceful CEO, Tiffany C. Wright

the president of Toca Family Business Services, a strategic and financial advisory firm which provides short-term & project-based C-level management. She is the author of Solving the Financial Equation: Financing Solutions for Small Businesses, available on Amazon.

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