Mind Your Business: The Percent of Revenues Method

By Steve Michaels
May 2007

Question: I have been approached by a larger competitor wanting to purchase my business.  They offered me a nominal amount down with a percentage of the revenues over a specific time.  Is this a good deal?

Answer: It's a good deal for the buyer.  The buyer will probably tell you that they will increase the billing.  Even though some of your clients may drop off, the remaining clients will be billed at a higher rate, thus making you more money in the end.  While in some cases this is true, what if this is not the case?

Your first question to them should be, "Would you sell your business that way?"

It all comes down to risk.  You are taking all of the risk that the buyer is going to do a good job servicing your accounts.  Their risk is nil, because you won't be paid for the lost accounts.  Typically, it is a larger service with more capacity and more features that will make this kind of offer, and in some cases they can do a better job of answering the phones.  They may have a better-trained staff, the latest equipment, and more money to devote to advertising.    

I always tell sellers to get cash—or at least as much cash up front as possible.  Check out the buyer to make sure they will do a good job.  If you elect to take their terms, place a UCC lien on the accounts with your secretary of state; this will remain in effect until the note is paid.  You can request a clause in the contract stating that you will receive a copy of the monthly billing register.  This allows you to check for the churn rate on your accounts and serves as a backup to your payment from the buyer.  

Finally, don't listen to the first buyer that approaches you and says their way of doing business is industry standard.  It may be standard for them, but not for the industry as a whole.  You've spent a lot of time building your business, and you don't want to sell to the first buyer without doing your own due diligence.

Steve Michaels is a business broker; he can be contacted at 800-369-6126 or at tas@tasmarketing.com for questions.  His Web site is www.tasmarketing.com.