Three common deal structures for handing off a small trades business: internal buyout, external sale, and partial sale with earnout. Each has trade-offs around price, timeline, and continuity.
The shape of the choice
Most small trades businesses are handed off in 1 of 3 structures. The right one depends on whether there is a credible internal buyer, how much risk the seller is willing to carry, and how important continuity of the workforce and customer base is to the seller.
These are not the only structures. Larger businesses sometimes use ESOPs (Employee Stock Ownership Plans) or family-trust arrangements. For most owner-operated trades shops, the 3 structures below cover the field.
Comparing the 3 structures
Each structure shifts risk and reward differently. Read each option below, then take the comparison to a CPA and an attorney before making the call. Most sellers learn the most by talking through all 3 with a buyer candidate, even if only 1 is realistic in the end.
How financing typically works
Internal buyouts are typically financed with a combination of buyer cash, seller financing (the seller carries a note for part of the price), and an SBA 7(a) loan. The 7(a) program will finance up to $5 million for business acquisition, including goodwill, with terms commonly between 7 and 10 years for non-real-estate purchases.
External sales to a strategic buyer or competitor are sometimes all-cash but more often include some seller financing or earnout. Private-equity-backed roll-ups in home services typically pay all cash but at a lower multiple, or use stock plus cash structures.
Partial sales with earnout combine an upfront payment with payments contingent on the business hitting agreed-upon revenue or EBITDA targets in the years after sale.
Tax structure matters as much as price
An asset sale and a stock sale produce very different tax outcomes for the seller. Asset sales typically produce ordinary income on the goodwill component for the seller and depreciation recapture on equipment. Stock sales typically qualify for capital-gains treatment.
The IRS publishes the rules in Publication 544 (Sales and Other Dispositions of Assets) and Publication 550 (Investment Income and Expenses). The CPA helping with the sale should run the math on both treatments before the structure is finalized.
The structures, side by side
Internal buyout
A current employee or partner buys the business from the owner.
How it works
Typically financed with buyer cash, seller financing, and often an SBA 7(a) loan. The seller often stays on as a consultant for 1 to 2 years to transition customer relationships. Most common buyer profile: a long-tenured journeyman or master-level employee who already runs the day-to-day.
Best for
Owners who care about continuity of the workforce and customer base. Owners with a credible second-in-command who has been with the company at least 5 to 10 years.
Watch-outs
The internal buyer often does not have the cash for a meaningful down payment. Seller financing exposes the seller to default risk. The conversation can damage the working relationship if the buyer says no. Run the numbers and have the conversation guide ready before raising it.
External sale
Another company, an outside individual buyer, or a private-equity-backed roll-up buys the business.
How it works
Typically marketed by a business broker. Strategic buyers (a competitor expanding into the territory) and private-equity roll-ups are 2 common buyer profiles. PE roll-ups usually pay all cash at a lower multiple. Strategic buyers may pay more but often want the seller to stay on for a longer transition.
Best for
Owners with no internal buyer candidate. Owners who want a clean break and are comfortable with the buyer changing the brand and the culture. Larger trades businesses (over $2M revenue) where roll-up buyers are active.
Watch-outs
Roll-up buyers often rebrand the trucks and consolidate operations within 12 to 24 months. Long-term employees may not be retained. Customer retention after the sale is typically lower than with an internal buyout. The broker fee is typically 10% of the sale price for businesses under $1M.
Partial sale with earnout
The seller sells a portion of the business upfront and the remainder over time, with the second payment contingent on performance.
How it works
The seller takes an initial payment for a majority interest. The buyer (often an internal employee or a partner from outside) takes operational control. The remaining payment is structured as an earnout tied to revenue or EBITDA targets over 3 to 5 years. The seller keeps a minority equity stake during the earnout period to align interests.
Best for
Owners who want partial liquidity now while staying involved. Situations where the buyer cannot afford the full price upfront. Sellers who want the buyer to have real skin in the game during the transition.
Watch-outs
Earnout terms are negotiated heavily. The seller's protection is the contract. If the buyer mismanages the business, the earnout can disappear. Always have an attorney draft and review the earnout provisions. Define the financial metrics, the audit rights, and what happens if the buyer changes the business model in ways that affect the metrics.