When an entrepreneur sells his company, he would ideally like to have 100% of his money at the closing of the transaction; this happens very rarely, and usually can exist when it is an asset sale. When talking about selling shares, there are three main reasons for the existence of the balance of sale:
- To protect themselves in accordance with representations and warranties. The buyer wants a way to negotiate liability in the event of lawsuits, or if problems in the business arise after the fact.
- To finance oneself, because not all transactions are necessarily 100% financeable by banks.
- It is often a requirement of banks to ensure that the seller will remain available after the transaction to help the buyer in case of challenges.
The amount of the balance of sale can vary and there are different definitions of the acceptable amount:
- A percentage of the transaction amount,
- A multiple of EBITDA,
- A balance of sale of the same amount as the seller’s down payment.
A significant trend is the fact that the balance of sale will depend on the amount of tangible assets in the transaction:
- The more real estate, the smaller the balance needs to be.
- If there is equipment, it will all depend on the total value, but it will be a little more substantial.
- If the transaction is pure or mostly goodwill, the balance of sale will be more important.
Once the amount has been determined, it is a question of properly structuring the transaction, because it is necessary to see how the balance of sale will be guaranteed, how it will be repaid, what conditions will be imposed by the bank, and what the interest rate will be.