So, you want to sell your broker. Before you enter the process or fixate on the headline number you have been offered one of the most important things you can do is answer this question first: what do you actually want your life to look like after the deal? Once you establish the driving force behind the deal and the main aim you want to get from it personally you will be able to enter the process with clarity and more importantly negotiate terms to suit you.
The phrases Cash up Front and Deferred consideration will be thrown around a lot, and although neither are right or wrong or a better option it is important for you to understand what each means.
Cash up Front: The amount you agree to sell your business for, paid to you in a lump sum on completion.
Deferred consideration: This is a portion of the sale price that is held back and paid to you over an agreed period of time once the deal completes. This is typically 1, 2 or 3 years and the amount can be dependent on how your business performs within this time frame.
Look at the example below of a Broker who generates £500k income per year. The deal is valued on an income multiple of 1.5x resulting in a total sale value of £750,000.
The buyer can either offer a cash up front deal structure, resulting in the owner receiving £750,000 in full on day one with no further commitment or involvement required. Alternatively, a mixed structure can be agreed on a 70/15/15 basis, where 70% of the total deal value — £525,000 — is paid on completion, with the remaining 30% paid in two equal instalments over two years.
| Cash Up Front | Mixed (70/15/15) | |
|---|---|---|
| Structure | 100% day one | 70% day one |
| Day one — guaranteed | £750,000 | £525,000 |
| Year 1 deferred (15%)If income grows to £550,000 | — | £123,750 |
| Year 2 deferred (15%)If income grows to £605,000 | — | £136,125 |
| Total received | £750,000 | £784,875 |
| Additional value from growth | — | +£34,875 |
The key point with the deferred element is that the year one and year two payments are not fixed — they are calculated on the actual income the business generates in those years. Grow by 10% and, as the table illustrates, receive an additional £34,875 above the original deal value. However, this works both ways. If income falls, the deferred payments reduce accordingly, meaning you carry a degree of performance risk on that portion of the consideration.
Once you understand how deals are structured, it becomes much easier to assess which approach best suits the life you want to live after the sale.
If your goal is no ongoing commitments, no continued involvement in the business and you have the right operational foundations in place to allow the business to run without you, then cash up front is the simplest and most effective route. You receive your full consideration on day one and walk away.
However, if you still want some involvement post-sale, perhaps in a reduced or more relaxed capacity, then a mixed or deferred structure may be worth considering. The important thing to understand here is that buyers will typically expect to see continued growth during the deferred period, which means you will need to remain reasonably active in the business to secure those payments.
The example we have used is deliberately straightforward and a clean illustration of how a deal structure might look in practice. In reality, every deal is different. The split between upfront and deferred consideration, the targets attached to deferred payments, and the timescales involved are all negotiable. Once you are clear on what you want to achieve from the sale, those terms can be shaped around your goals.
Let us know if you would like to hear the positives and drawbacks to both Cash up Front and Deferred Consideration Deal Structures…