Valuing a Contractor’s Business – Buyout Option B
When valuing a contractor’s business business for the purpose of transferring shares to a new member, a structured agreement can be highly beneficial for both the seller and the buyer, especially given the context of a staggered ownership transfer and the projected financials. Here are some contract terms that could be included to protect the interests of both parties:
1. EBITDA Sharing Structure:
- EBITDA Threshold: Set a clear EBITDA threshold, such as $250,000, which must be exceeded before the profit-sharing mechanism kicks in. Which ensures that the company is performing at a sustainable level before additional payments are made to the seller.
- Graduated Payments: Implement the graduated payment structure you proposed:
- Year 1: Seller takes 100% of EBITDA above the threshold.
- Year 2: Seller takes 80% of EBITDA above the threshold.
- Year 3: Seller takes 70% of EBITDA above the threshold.
- Year 4: Seller takes 60% of EBITDA above the threshold.
- Year 5 and Beyond: Seller takes 100% until the $625,000 is fully paid off.
2. Seller Financing Terms:
- Interest on Deferred Payments: If the seller is financing part of the purchase price, include an interest rate on the deferred payments, potentially tied to a benchmark rate (e.g., prime rate + 2%).
- Acceleration Clause: If the company performs exceptionally well, include a clause that accelerates payment if EBITDA exceeds a significantly higher threshold.
3. Performance-Linked Adjustments:
- Adjustments for Underperformance: If EBITDA falls below the three-year trailing average of $218,671 in any year, consider allowing the buyer to defer payments or reduce the percentage paid to the seller.
- Bonus Payments for Overperformance: If EBITDA significantly exceeds the projected $306,435, consider additional payments to the seller as a bonus or an incentive for strong company performance.
4. Control and Decision-Making:
- Operational Control: Clearly define the level of operational control the buyer will have during the five years, particularly in decision-making related to major expenses, hiring, and project selection.
- Consultation Requirements: Include a clause requiring the buyer to consult with the seller on significant business decisions during the transition period.
 5. Buyer’s Equity Growth:
- Equity Vesting Schedule: Implement a vesting schedule for the buyer’s equity ownership,tied to both time and performance metrics. For example, the buyer might earn an additional percentage of equity each year if certain EBITDA or revenue targets are met.
6. Seller’s Role Post-Sale:
- Consultancy Agreement: Include a consultancy agreement where the seller remains involved in the business as a consultant for a defined period, ensuring continuity and smooth transition.
- Non-Compete Clause: Include a non-compete clause to protect the buyer from the seller starting a competing business or joining a competitor during the transition period and for a few years after the sale is complete.
7. Exit Strategy:
- Prepayment Option: Allow the buyer the option to prepay the remaining balance to the seller, possibly with a discount for early payment, to incentivize faster completion of the buyout.
- Dispute Resolution: Establish a clear dispute resolution process in case disagreements arise over the terms of the agreement, such as using mediation or arbitration.
8. Security for Payment:
- Collateral: Secure the seller’s payments with collateral, such as a lien on company assets or personal guarantees from the buyer, to ensure that the seller is protected in the event of non-payment.
These terms can help balance the risks and rewards between the seller and buyer, ensuring that both parties are incentivized to maintain and grow the business during the transition period. valuing a contractor’s business Valuing a Contractor’s Business valuing a contractor’s business valuing a contractor’s business