Deal structures when selling a business in Singapore

Why the deal structure matters as much as the price

Two offers of S$3m can be worth very different amounts. One may pay S$2.7m on the day you complete. The other may pay S$1.5m on the day and the rest over three years, only if profit targets are hit, while you stay on as an employee.

Buyers use structure to share risk with you. The more the value depends on you personally, on a few large customers or on a recent jump in profit, the more of the price a buyer will want to defer or make conditional. The building blocks are few, and most deals combine two or three of them.

Share sale or asset sale: what is the difference?

Underneath every structure is one decision: are you selling the shares of your company, or the assets of the business?

In a share sale, you sell your shares in the company and the company carries on as before. Its tax losses, liabilities, contracts, licences and employees all stay with it. The buyer inherits the company's history, good and bad, and protects itself with warranties and indemnities from you. Contracts and leases may still contain change-of-control clauses that need the other party's consent, so check them early.

In an asset sale, the company sells its business (equipment, stock, goodwill, customer contracts, intellectual property) to the buyer and keeps the company shell. The buyer can leave liabilities behind. The cost is effort: contracts, leases and licences must each be transferred or re-applied for, and employees' contracts need to be moved across. The Employment Act has rules on transfers of employment, and your lawyer will advise on how they apply. If you trade as a sole proprietorship or partnership, there are usually no shares to sell, so the sale is in substance an asset sale.

Some licences generally cannot simply be transferred, which usually pushes a deal towards a share sale. Examples include MOM employment agency licences in recruitment, MAS approval on changes of control of licensed financial advisers, NEA and PLRD licences in cleaning and security, BCA registration grades in construction, SFA licences in food, and HCSA healthcare licences. Rules differ by licence, so check yours with your lawyer before agreeing terms. The tax side is covered in our guide to tax and stamp duty on selling a business.

Cash at completion: the number that matters most

In SME deals, typically 50% to 85% of the price is paid at completion. That money is certain, and it is the figure to compare first across offers.

It is rarely the headline figure. Most offers are made on a cash-free, debt-free basis with a normal level of working capital, so bank loans, finance leases, unpaid tax and customer prepayments are usually deducted before you are paid, and any retention is held back on top. Our guide to working capital and net debt walks through that bridge with a worked example.

Three practical steps help:

• Ask each buyer to state the cash payable at completion in the heads of terms, not just the headline price.
• Ask how the buyer is funding it: its own cash, a bank loan, or investors. Ask for evidence before you grant exclusivity.
• Work out your own estimate of debt and working capital before you go to market, so the deductions do not surprise you late in the deal.

Deferred consideration: fixed payments after completion

Deferred consideration is a fixed amount paid on a later date, such as 10% of the price twelve months after completion. Unlike an earn-out, it does not depend on how the business performs. Your risk is the buyer's ability and willingness to pay when the date arrives.

Protections to discuss with your lawyer include:

• a guarantee from the buyer's parent company or its owners;
• security, such as a charge over the shares you sold, so you can recover them if the buyer does not pay;
• interest on late payment, and the full balance falling due at once if the buyer defaults or sells the business;
• limits on the buyer's right to withhold deferred payments against claims that have not been agreed or decided.

How earn-outs work, with a worked example

An earn-out pays part of the price later, only if the business hits agreed targets after completion. Earn-outs of 20% to 40% of the price are common for owner-dependent businesses, because the buyer wants proof that customers and profit stay once you step back. Around a third of adviser-led sales do not complete, most often over a valuation gap of 11% to 20%, and an earn-out is one of the few tools that can close a gap of that size.

The detail decides whether you are ever paid. Points to settle in writing:

• The measure. Revenue is simple to check. Gross profit or EBITDA can be reduced by the buyer's own decisions, such as head-office charges or new hires.
• The accounting rules. Which policies apply, and which costs the buyer may charge to the business during the earn-out.
• Control. Whether you keep enough say over pricing, staff and customers to influence the result.
• Sliding scale or cliff. Whether a near miss pays something or nothing.
• Change of ownership. What happens if the buyer sells, merges or restructures the business before the earn-out ends.
• Disputes. Who resolves disagreements, usually an independent accountant.

Illustration only. A buyer offers S$3.0m: S$2.1m at completion (70%), S$300,000 deferred for twelve months (10%), and an earn-out of up to S$600,000 (20%) based on first-year EBITDA. The earn-out pays in full at EBITDA of S$800,000 or more, nothing at S$640,000 or less, and on a straight line in between.

If the same earn-out were a cliff, paying only at S$800,000, the S$720,000 year would also pay nothing, and you would receive S$2.4m. The shape of the earn-out can matter as much as its size.

Vendor finance and payment in the buyer's shares

Vendor finance means you lend part of the price to the buyer, who repays you with interest over an agreed period. It is most common with individual buyers and management buyouts, where bank funding does not cover the full price. Treat it as a loan to a new business owner. Your loan often ranks behind any bank lender, so ask for security, a personal or parent guarantee, regular financial information, and the right to demand repayment if payments are missed.

Payment in shares is most common with listed acquirers. Headline multiples of 8x to 18x in SGX announcements are usually on guaranteed future profit, paid partly in the buyer's own shares, with lock-ins of 6 to 15 years. Restated on upfront cash, many come back to 2x to 4x. Far East Group's 2019 purchase of an air-con installer had a headline of about 9.3x guaranteed profit; the guarantee was missed and the real price was about 1x net tangible assets.

Before accepting shares, ask:

• At what price are the shares issued, and how has that share price moved?
• How long is the lock-in, and can you sell any shares during it?
• What happens if a profit guarantee is missed: do you pay cash back, return shares, or lose future tranches?

For context on what Singapore SMEs sell for on a cash basis, see our Singapore SME valuation multiples research.

Retentions, warranties and indemnities

Warranties are statements you make about the business in the sale agreement: the accounts are accurate, taxes have been paid, there is no undisclosed dispute. If one proves untrue and the buyer suffers a loss, the buyer can claim against you. You limit this exposure through a disclosure letter, which sets out known exceptions, and through limits agreed in the contract, such as an overall cap, time limits for claims and a minimum claim size.

Indemnities are promises to cover a specific, known risk pound for pound, such as an open tax query or a dispute with a former employee. Buyers usually ask for them where due diligence has found something they cannot price.

A retention is part of the price held back, by the buyer or in an escrow account, for an agreed period as a fund for claims. It is released to you at the end of the period, less any agreed claims. Negotiate the amount, the period, who holds the money, and whether interest is paid on it.

A clean, well-prepared business keeps these protections small. Our due diligence checklist covers what buyers check.

How to compare offers on a like-for-like basis

Put every offer through the same steps before deciding which to take forward:

1. Work out the cash at completion after debt, working capital and any retention.
2. Add fixed deferred payments, and judge how likely the buyer is to pay them.
3. Value any earn-out on a realistic view of the targets, and on how much control you keep.
4. Value any shares at a sensible discount for the lock-in and the risk of the share price falling.
5. Compare warranty, indemnity and retention terms, which can reduce what you finally keep.
6. Note what you must commit to after completion: how long you stay, in what role and on what pay.
7. Ask your tax adviser what each structure leaves you with after tax, stamp duty and GST.