Business Valuation and Earnouts for Your Business Sale: What You Should Know

Earnouts, like business valuation, can be an important aspect of negotiating the right sale price for your business. An earnout allows the seller to take a lower buying price while not losing out on financial gain. An earnout gives the seller a portion of future earnings once certain pre-agreed-upon figures are met.

Earnouts can be particularly useful when the value a business owner has placed on the business does not match the value placed on it by the prospective buyer. Each may have their own criteria for valuation and may give different weight to various factors.

For instance, an owner may value the history of the business’s success far more heavily than a prospective buyer may. A buyer may be more interested in current financials, how the business stacks up against competitors and any intellectual or proprietary properties that may come with the business purchase.

This is where a professional valuation can be of critical importance. The professional business valuation takes emotion and sentimentality out of the valuation equation, placing the seller in a much stronger position to receiving his or her asking price. Having a professional business valuation also creates a strong, documented justification for the asking price, including a detailed breakdown of how the asking price was determined.

This also allows the business owner or seller to make more accurate estimations in approaching earnouts if the buyer does not have all of the upfront funds for the purchase. Professional valuations help place the business owner in a power position for negotiating fair prices and terms for what, in many cases, is a lifetime of hard work and sacrifice.

Conversely, the prospective buyer then can objectively analyze all of the facts and figures, including items that may not have been previously considered. This puts the buyer in a great position for gaining complete understanding in the true value of the business being considered. Such information can help create a new plan for success once the purchase is complete, or can help the buyer see new ways to make the business even more successful.

All the information and elements gained from a professional business valuation helps both the buyer and seller reach a fair and justified agreement. In business and negotiation, the business valuation helps expedite the sales process, allowing both parties to gain knowledge about the business for sale and to quickly act on that knowledge. Valuating your business offers an invaluable tool when selling your business.