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Come Together

Want to buy a successful business-and keep it going strong? An earn-out agreement puts you and the former owner in the same corner.

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This story appears in the October 2006 issue of Start Up.

Question: I just found out the owner of a local Italian restaurant is planning to retire, and I'm thinking of approaching him about buying his . But I don't have a lot of cash to put down, and I'm not sure if I can qualify for a bank loan. I'm also worried that, once the owner leaves, a lot of his customers may go elsewhere. Any ideas?

Answer: One option to consider is an earn-out. Unlike the billion-dollar you read about in the newspaper, buying a small company can be tricky--for both the buyer and the seller. Without a public market to set the price, calculating how much a small, privately held business is really worth is not always easy. And if the owner is a popular figure in the community, the customers who were loyal to him may not be loyal to you. Structuring the deal as an earn-out can solve these problems.

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