Payment Structures in SaaS or Ecommerce Acquisitions
Even though buying or selling an online business is often a more streamlined process than buying or selling a brick-and-mortar business, there can still be varying economic terms. This article briefly introduces some of the more common payment structures for digital assets.
The simplest payment structure for any transaction is payment in cash. This is a common structure for smaller SaaS or Ecommerce transactions. Even in all-cash deals, though, there can still be details to negotiate: Is there an earnest money deposit? Will there be any adjustments to the purchase price? If so, how will they be calculated? What portion of the purchase price will remain in escrow to ensure the buyer is satisfied with the transaction?
Another common payment structure is a promissory note. If you have heard of the concept of “seller financing,” then you will have some idea of the mechanics of a promissory note. Under a promissory note, the buyer will make a series of payments to the seller in the same way the buyer would make a series of payments to a bank to repay a loan. There will also be interest assessed to account for inflation and the time-value of money. In most instances where the buyer and seller sign a promissory note, there will also be an up-front cash payment with the remainder of the purchase price being paid according to the terms of the promissory note. The split between up-front and deferred payment is something that buyers and sellers will want to focus on during negotiations; after all, a dollar today is worth more than a dollar in a few months or a few years.
In many situations, both the buyer and the seller want to make sure that the business continues to be successful after the transaction closes. One of the best contractual ways to work towards this is through an earn-out provision. An earn-out provision is a way to protect a buyer from overpaying for a business that might have had its valuation artificially inflated only for revenues to fall after the acquisition as user churn takes its toll. They also offer sellers incentives to have everything in the business running properly when control is transferred and to set the business up for continued growth and success. These earn-out provisions can be part of separate transition services agreements. If you want to read more about how transition services agreements work, you can check out our separate article describing them.
There are several options for structuring the purchase of digital assets. What is best will vary by transaction and the circumstances in which the buyer and seller find themselves. For guidance on how you should structure your transaction or about any other part of the process of buying or selling a SaaS or Ecommerce business, contact us at info@barlowwilliams.law.