When you decide to sell a business (whether brick-and-mortar or an ecommerce company), sometimes it makes sense to structure the deal so there are payouts after closing.
Why Post-Closing Payments Occur When You Sell A Business
One of the most common reasons a seller will want to do this is to minimize the taxes paid on the income received from the sale of the company.
On the flip side, it’s common for buyers to want to make some of the payments on the back end. Some purchasers want the sellers to earn out, getting some of the compensation as post-closing obligations are fulfilled and/or certain milestones are met (for example, financial targets are met consistent with seller representations about the company’s profitability).
Other buyers are simply strapped for cash, i.e. they have monetary shortfall and plan to rely upon the company’s revenues to pay part of the purchase price over a period of time. In essence, this is seller financing that an unsophisticated seller might not even be aware is occurring.
Why Accepting Payments Later When You Sell A Business Can Be Risky
Although spreading out compensation over a period of time can have tax and other advantages for a seller, there’s a fundamental risk of nonpayment associated with such payment terms.
For example, there’s a restaurant group that sold one of its locations to an executive chef. As part of the deal, there was a consulting agreement where the seller was to be paid. Now the seller has sued, claiming the buyer has breached the agreement by not making payments due.
Regardless of whether the seller is owed the money, the fact is there is an expectation of payments post-sale and those payments are apparently not being made.
According to Internet Lawyer Mike Young, in many instances, the failure to receive payments post-closing makes the difference between a profitable deal and a de facto sale of a company for a loss.
How Can You Protect Yourself As The Seller From Risk Of Non-Payment?
In the offline world, it’s common to retain a security interest in the physical assets of company that’s sold. Upon default, the seller takes possession of the assets in question.
For ecommerce companies, sellers frequently protect themselves by having certain assets held in escrow that will not be released to the purchaser until payments have been made. This can include source code, domain name registrations, and other intellectual property.
A qualified business lawyer (particularly one with Internet law experience if the company does ecommerce) can help protect your legal rights when you’re selling or buying a company by structuring the deal correctly to minimize the risk of lawsuits later.