Price in the sale of businesses: Do I fix or variable?
In the sale of companies you can set a fixed or variable price.
Historically, the usual attachment mechanism price for an operation Sale of businesses It was to establish a closed amount to be determined date. However, the processes of buying and selling companies have become more complex and today, It is very often that you establish a variable cost, based on the achievement of certain milestones.
When the agreement is one fixed price, usual based on the financial statements closing date (locked box date), normally the last audited balance sheet. Thus the price is fixed and its review are not allowed, except in cases of default or demand for contractual liability.
In this case, the contract establishes a commitment by the seller, ensuring that between the closing date and the execution of the sale, there will be no decrease in the value of the company or perform any operation that may decrease.
This system makes operation simple. However, is appropriate to ensure that the balance is reliable and determine the guarantees in the event that differences occur with the true image of the company or from the date of closing and execution can produce some operation that reduces the value of the company.
It is increasingly common for a formula set in whereby a portion of the purchase price depends on the results in certain periods. It is what is called “earn-out”.
Through this type of formulas, the buyer ensures that the acquired company achieved the objectives agreed in the operation and reduces the risk of the transaction.
It is usual that the “earn-out” is part of the price, which generally ranges between 20 and 70%, according to the results achieved within one to five years.
And milestones to determine the “earn-out” often both operating (as the number of customers) as financial (EBITDA).
This makes it necessary to "view" the purchase agreement with other clauses relating to the maintenance of accounting principles or approval of operational plans, to prevent a "misuses" make use of contract, manipulating the figures in favor of the buyer or seller.
The advantages of variable price for the buyer are:
1.- The continuity of the management team guarantees.
2.- Reduces the risk of "surprises" appear in the purchase.
3.- The deferred payment of part financing makes less burdensome than a full payment in cash.
The main drawback is that the definition of the parameters can become very complex, creating problems that may end up in court. It is recommended that the parties to a third party acting as arbiter for determining compliance with the conditions subject.
Generally, It used the fixed price in mature sectors, where the brand is an important part of the value of the company, and variable cost in high growth sectors (technological), regulated (a legal change can sink an operation) or service (the continuity of the management team).