By: Bob Goldberg, RSPA General Counsel
Over the years I have been involved in countless sales of dealerships. In some instances individuals have sold their business, enjoyed life during their non-compete term only to go back into business and sell it again. The relationships dealers establish with their customers are long lasting. End users become accustomed to a level of service that if not maintained following a sale is welcomed back when offered. The structure of a sale is always critical. It is not the purchase price, but the net dollars after taxes that count.
The first question to resolve in a purchase is whether the buyer is purchasing stock or assets. A stock transaction favors the seller. An asset purchase does not come with the same liabilities, although the liabilities of a stock purchased can be addressed in the sales document. If a dealership is a “C” corporation that has not elected Subchapter S status, a stock sale is very important in order to avoid double taxation of the transaction. A sale of stock will be taxed as a capital gain, a lower rate.
If a dealership is being purchase by a publicly traded company the purchase price may include stock in the acquiring company. The receipt of stock has tax advantages, but also risk due to market fluctuation. The seller may be restricted from selling the stock for a certain period of time. In most situations a buyer will offer an all cash purchase with a holdback of an agreed amount to protect the buyer from possible events that would affect the value of the business.
Buyers will at times initially propose a cash portion of the sale price coupled with an earn-out. Sellers should avoid an earn-out of any significant portion of the sales price. I usually advise the seller that they should consider the cash price as the full price and decide if that amount is adequate for the sale of the business. Typically, a buyer defers paying the earn-out until an established target is achieved. The target could be a financial result, a sales amount, or retention of a set number of end users. Usually the target must be reached within an established period of time. It is even possible that there will be several earn-outs spread over numerous time periods. Many earn-outs will accelerate on the occurrence of certain events, usually the sale of the business or termination of a key employee.
Sellers should be cautious when an earn-out is proposed. Experienced deal professionals know that buyers can find numerous ways to avoid paying earn-outs, either by deferring revenues, restructuring the company post-closing, or prioritizing other lines of business until the earn-out period has elapsed. As a seller you have no voice in the operations of your former company.
To be clear, earn-outs are not always bad. They often serve as effective tools to align incentives between the seller and buyer to ensure a smooth transition. Or they may be used to reconcile differences in the valuation of a company between an enthusiastic seller and a skeptical buyer. One court in resolving a disputed earn-out observed “Earn-outs all to often transform current disagreements over price into future litigation over outcome.”
Selling your business is one of the most important events in your career. Making sure that the sale is properly structured and fair and equitable to both the buyer and seller is ideal. The point-of-sale industry has seen hundreds of sales and a keen awareness of the process has been established. Don’t go it alone, but seek competent and experienced assistance.