Protect what you take home, not just the price on the first page.
When you sell a business, the headline price is only part of the deal. The final agreement may include cash at closing, payments over time, performance-based consideration, escrow, and adjustments for working capital or inventory.
Those terms determine when you get paid, what could reduce your proceeds, and how much risk you carry after the buyer takes over. If you’re planning to sell a business in California, understand the full payment structure before you accept an offer.
PRICE ISN’T THE WHOLE OFFER
Consider two proposals. One offers a higher price, but a large portion depends on an earn-out tied to results the buyer controls. The other offers a lower price, but more cash at closing and a well-qualified buyer with a credible financing plan.
The second offer may be the better outcome. A payment you actually receive, on clear terms, can be worth more than a larger promise with conditions attached.
That’s why comparing offers means looking at cash due at closing, deferred payments, buyer qualifications, contingencies, and your potential obligations after closing, not just the top-line number.
A current, market-based valuation can help you assess whether an offer’s price and terms make sense together. Our free sale-focused valuation helps you understand where you stand before you decide your next move. For owners searching “business valuation California,” it’s also a practical place to start discussing the value of the business and possible deal structure.
SELLER FINANCING: A NOTE, NOT CASH
With seller financing, you receive part of the price at closing and agree to be paid the rest over time. The buyer signs a promissory note: a written commitment to repay the agreed principal, interest, and other amounts under specified terms.
Seller financing may help bridge a gap between the buyer’s financing and the agreed price. It can also make an offer more competitive. But the unpaid balance is a loan to the buyer. You are taking credit risk, and future payment depends on the buyer’s ability and obligation to pay.
Review these points with your attorney and financial advisors:
- Down payment: How much of the purchase price is paid to you at closing?
- Interest rate: What rate applies, and how and when is interest calculated?
- Term and payments: What is the payment schedule? Is there a balloon payment at maturity?
- Security: What specific collateral, if any, secures the note? Are other lenders ahead of you?
- Guarantees: Will the buyer’s owners personally guarantee repayment, and what are the limits?
- Default terms: What counts as default? What notice, cure period, and remedies apply?
- Lender restrictions: Does a senior lender require the seller note to be subordinated or payments to be paused?
A security interest and a personal guarantee can provide additional protections, but neither guarantees repayment. A security interest may be subordinate to a bank’s claim, and collateral might not be worth enough to cover the balance if the buyer defaults. The California Secretary of State explains that a UCC financing statement can be filed to perfect a security interest; proper documentation, filing, and priority should be reviewed with your attorney. See the Secretary of State’s UCC filing information and California Commercial Code section 9203.
Also ask your tax advisor how installment-sale rules may apply. The IRS explains that reporting can depend on the assets sold and the payment terms; a business sale may require special analysis. Review IRS Publication 537 with your CPA.
EARN-OUTS: MAKE THE FORMULA CLEAR
An earn-out is contingent purchase price: you receive an additional payment only if agreed conditions are met after closing. It can help bridge a disagreement about value, future growth, or customer retention. It can also leave you waiting for money while the buyer controls the business.
The metric must be measurable and specific. If payment depends on revenue, define revenue. If it depends on profit, specify the accounting method and treatment of owner compensation, overhead, refunds, one-time costs, and changes in operations.
Your agreement should also spell out:
- The measurement period, targets, caps, and payment dates.
- How you’ll receive reports and access supporting records.
- Whether you can audit the calculation and how disagreements are resolved.
- What happens if the buyer changes the business, sells it, or closes it.
- Any commitments the buyer makes about operating the business or tracking results.
Vague language invites disagreement. “A percentage of future growth” is not a reliable payment formula unless the agreement explains exactly how that growth is calculated and verified.
An earn-out may make strategic sense when the business has a credible opportunity that has not yet shown up in its financial results, or when a specific, verifiable future milestone can resolve a real difference in expectations. Be careful about accepting one simply because it makes an otherwise uncertain offer appear larger.
HOLDBACKS AND ESCROW: KNOW WHAT’S BEING HELD
A holdback is a portion of the sale proceeds kept back after closing, often in an escrow account. It may secure specified claims or cover an agreed adjustment. Unlike an earn-out, it is generally not tied to the business hitting future performance targets.
Before agreeing, identify the amount, purpose, release date, claim process, and who controls the funds. Ask for a clear process for raising and resolving claims, timely release of any undisputed amount, and limits on deductions or setoffs.
A holdback can be a reasonable way to address a specific concern. An open-ended holdback gives you less certainty about how much you’ll ultimately receive.
WORKING CAPITAL AND INVENTORY CAN CHANGE THE CHECK
Many transactions include a working-capital adjustment. The buyer and seller agree on a target level of operating working capital, then compare it with a calculation around closing. If the delivered amount is above or below the target, the price may be adjusted.
Define the calculation in detail. Identify which assets and liabilities count, how accounts receivable and payables are treated, and how items like customer deposits, accrued payroll, debt, and transaction expenses are handled. Set deadlines for exchanging calculations, reviewing records, objecting, and resolving disputes.
Inventory needs its own attention. Is it included in the price, counted and purchased separately, or subject to an adjustment? Agree on how obsolete, damaged, or unsalable inventory will be treated and how the final count is performed. A short definition can prevent a costly argument after closing.
TRANSITION AND CONSULTING: AGREE ON THE WORK
Buyers often ask sellers to help transfer customer relationships, train staff, and explain how the business operates. Put the transition period, expected hours, duties, availability, and compensation in writing. Distinguish the purchase price from separate consulting or employment payments so everyone understands what each payment covers.
If the buyer also proposes an earn-out, be especially clear about how your transition duties relate to the earn-out. Don’t assume that staying on will give you control over business decisions or guarantee a contingent payment.
STRUCTURE THE DEAL AROUND YOUR GOALS
Whether seller financing or an earn-out makes sense depends on your priorities, the buyer’s strength, and the details of the offer. A strong buyer with a lower price may offer more certainty than a weak buyer promising more. A seller note may help close a viable deal, but only if the terms and risks are acceptable to you.
As you consider how to sell a business, include payment structure in your exit strategy for business owners, not as an afterthought once the price is set. A business broker California sellers choose should help them compare the complete offer and keep the process organized. If you’re searching “business brokers near me,” look for an advisor who will explain the payment terms plainly and coordinate with your legal and tax professionals.
For help with a confidential business sale, learn about our services or schedule a conversation. David and his team have helped owners across more than 117 markets. Whether a buyer is local or based in Phoenix, the goal is the same: qualified prospects, clear terms, and the best possible outcome for you.
If you’re beginning to prepare business for sale, small business valuation services can help you understand your position before offers arrive. Start with a free valuation, or contact David directly for a confidential, no-pressure conversation.
Deal structures can have significant legal and tax consequences. Work with qualified legal and tax professionals to review your specific transaction.
ABOUT DAVID
David Mayfair is a Business Sales Advisor at SD Business Advisors. David Mayfair and his team have sold over 850 businesses since 2007. He learned about the industry when he became a business buyer in 2000. He offers a free, sale-focused valuation and a confidential, no-pressure process. Contact him at 650-304-1138.
