You should ideally buy the type of business you know something about or have experience with from past work. But if you want to speed-up the process, and if you buy a larger business with employees that run the business, you may find it’s quicker and easier to buy a business you know nothing about.
To protect yourself from an earnout, include a clawback clause such that if sales or profits fall short post-acquisition, the seller must repay part of the sales price. Also, by funding the acquisition using seller financing, any clawback can be deducted from seller financing payments.
An earnout is when you buy a business, where part of the acquisition price is deferred and contingent on future sales or profits. The amount of the earnout will reflect the business’s performance, with any additional payment due tied to its success post-acquisition.
The seller of a business can lend a buyer the money to buy their own business, and this type of lending is called seller financing. Business buyers prefer seller financing because it’s quicker and easier to arrange than bank financing, which means it will be quicker for the business to be sold.
The best way to explain seller financing in business, is to imagine buying a car from a friend, but you don’t have all the money to buy it. But, as your friend trusts you, and they need to sell their car now, they agree to let you pay a bit each week or month until you’ve paid for the car in full.
You can do seller financing in the UK, where the seller lends the money to the buyer to buy their business. Actually, it’s the business itself that finances the deal and seller finance is used in many business acquisitions in the UK, and is a legally accepted way to fund the purchase of businesses.