Why Selling Your Business Does Not Always Mean Immediate Cash
Updated: 3 days ago
Selling your business does not always mean receiving the entire price at settlement, because part of the consideration may be deferred or conditional.
In practice, selling a business is often more gradual. A buyer may have the capability to take over, but not enough cash or bank funding to pay the full purchase price on day one. The business sale can still proceed, but the outgoing owner may receive part of the price over time rather than all at settlement.
That is where a business exit funding conversation can become important.
The sale price and the cash received can be different
A business may be worth $1 million, but that does not mean the seller receives $1 million in cleared funds at settlement.
The purchaser may contribute their own funds, obtain commercial finance and ask the seller to accept the balance through vendor finance or staged payments. This is often called a staged business sale.
It may be a practical way to transfer ownership to a family member, employee, management team or external buyer. But it also changes the outgoing owner’s position. They may still have money tied up in the business after they have stepped back from it.
Why this can create pressure for the outgoing owner
The seller may need money for retirement living costs, to repay a home loan, settle business liabilities or simply create financial certainty after years of being tied to the business.
If the owner accepts delayed sale proceeds without a plan for their own liquidity, the transition can become stressful for everyone involved. The buyer feels pressure to repay quickly; the business may be required to produce more cash than it safely can; and the seller may remain financially dependent on a business they no longer control.
The question is not only, “What is the business worth?” It is also:
Funding a business exit is about structure
Funding a business exit does not necessarily mean borrowing to sell a business. It means looking at how the whole transition can work.
Depending on the circumstances, the structure may include:
commercial acquisition finance for the incoming owner;
a buyer contribution;
vendor finance or deferred consideration;
a staged transfer of shares or assets; and
where appropriate, a separate personal-liquidity solution for the outgoing owner.
Each part needs to be assessed in context. A structure that is manageable for the buyer also needs to leave the seller with an acceptable level of certainty and flexibility.
Plan before agreeing to the deal
If a purchaser cannot fund the full price upfront, that does not automatically mean the sale should not proceed. It means the funding structure deserves careful attention before terms are agreed.
Before committing, business owners should understand the timing of each payment, what security is available, how the business will service its obligations and what happens if a payment is delayed. Legal, accounting and tax advice are essential.
At Fairlane Finance, we help business owners and incoming purchasers assess the commercial funding side of a business transition. Our role is to explore whether commercial finance, vendor finance and other appropriate funding options can support a more workable path to exit.
Why can selling your business involve delayed payments?
The answer depends on the buyer, the business or franchise, the proposed structure and whether sustainable cash flow can support the commitments.
Why might part of the sale price be paid later?
A buyer may not have enough approved finance and equity to pay the whole price at settlement. The parties may also disagree about value or want part of the price linked to customer retention or future performance.
Possible structures include vendor finance, fixed deferred consideration, earn-outs and retention adjustments. Each shifts timing and risk differently and should be documented precisely.
What should the seller test?
How much cash is received at settlement?
Which later amounts are fixed and which are conditional?
What evidence determines an earn-out or retention payment?
What security, guarantees and priority protect deferred amounts?
Can the buyer and business service all obligations?
What happens on default, dispute or an early resale?
Further Fairlane reading
Frequently asked questions
Is deferred consideration guaranteed?
A fixed contractual payment may be owed, but collection still depends on the agreement and the buyer's capacity to pay. Conditional consideration may also change.
What is an earn-out?
An earn-out makes part of the price depend on future performance measured under an agreed formula.
Can the seller take security?
Potentially, subject to the transaction documents and the rights of any senior lender.
Should tax be considered before agreeing to delayed payments?
Yes. The seller should obtain qualified tax advice on the timing and treatment of the proposed structure.
Planning a Business Sale?
Discuss how the buyer's funding and deferred consideration may affect settlement proceeds.
General information only. This article does not constitute financial, credit, legal, tax, accounting, compliance or valuation advice. Finance is subject to lender approval, eligibility criteria, terms, fees and conditions. Consider obtaining independent professional advice for your circumstances before acting.
