Different Types of Consideration Included in a LOI or Purchase Offer

When you receive your LOI's or Purchase Offers, they likely will not just include a 100% cash at closing offer.  Most offers include some combination of the following:

CASH:  This needs no explanation.

ROLLOVER EQUITY:  As a portion of the purchase price of your business they may offer you a continued ownership percentage.  For example, they may offer that you rollover 10% equity ownership because they want to keep you engaged and see you may be valuable to some existing key client relationships.

SELLER NOTE: Now you are acting as a banker in part of the deal and lending the buyer part of the funds and being repaid over a time period, usually including interest.  I have typically seen these structured over 1-3 years with interest rates of prime + a couple/few points.

EARNOUT: This is a bonus payment made when certain agreed milestones are met.  For example, this can be a bonus payment made every time a key contract is renewed, or if revenues are maintained over a certain period.  When the milestone is triggered the earnout payment is due.

CONSULTING/EMPLOYMENT AGREEMENT: The buyers may want the extra peace of mind for continuity that you stay on board for an extended period of time from months to years.  The offer may include terms to this arrangement in the offer to sweeten the pot for you and also to help their transition.

The vast majority of deals that are small to mid-size companies include a combination of these forms of consideration to purchase your business.  It is important to evaluate each offer's true value and best fit for your objectives of money and time.

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If you have received an offer for your company and you do not have an advisor,  I recommend proceeding cautiously.  If you are ready to sell, you are better off running a process where you are in control and getting a better valuation for your company.