When evaluating ERC buyout offers, the terminology can be confusing. Understanding the key terms and how they affect your payout helps you make informed decisions and compare offers effectively.
The Percentage Game
You’ll often see buyout companies advertising that they pay “up to 90%” or “up to 92%” of your ERC value. The phrase “up to” is critical here.
This percentage represents the maximum total you might receive across all payments – not what you get upfront. The actual structure is typically divided into multiple disbursements over time.
Understanding Payout Structures
Most ERC buyouts follow a multi-tier payment structure:
Upfront Payment: This is the immediate cash you receive after closing, typically ranging from 65-75% of your total ERC value. This is the “quick capital” that most businesses are seeking when they pursue a buyout.
Holdback or Retainage: An additional 10-20% of your ERC value that’s paid later, usually when the IRS releases the refund to the buyout company. This protects the buyout company in case the IRS adjusts your claim downward.
Interest Component: The IRS pays statutory interest on delayed ERC refunds. Some buyout agreements include sharing a portion of this interest with you – often around 20% of whatever interest the IRS pays.
Discount Rate vs. Fee Structure
Different companies structure their pricing differently. Some use a “discount rate” – essentially buying your receivable at a discount. If they offer 85%, they’re taking a 15% discount.
Others may advertise a higher percentage but include separate fees for underwriting, processing, or administration. Always ask for the total net amount you’ll receive to make accurate comparisons.
Risk Allocation: Who Bears What?
One of the most important terms to understand is how risk is allocated if something goes wrong.
IRS Adjustment Risk: What happens if the IRS reduces your claim amount? Some agreements make this entirely the buyout company’s problem – you keep what you were paid. Others include “recourse” provisions where you might need to repay funds if the claim is significantly adjusted.
Audit Risk: After the buyout, who handles an IRS audit of your ERC claim? Reputable providers assume this burden completely, managing all communications and documentation requests.
Non-Payment Risk: What if the IRS denies your claim entirely? This is rare for already-filed claims, but the agreement should clearly state what happens.
Timeline Commitments
Pay attention to how timing is described in offers. “7-10 business days” should specify from what trigger point – from initial contact, from complete documentation submission, or from contract signing?
Be wary of promises that seem unrealistically fast without clear conditions attached.
Recourse vs. Non-Recourse
This is a critical distinction many business owners overlook.
Non-recourse means once you’re paid, the money is yours regardless of what happens with the IRS. The buyout company assumes all risk.
Recourse agreements may require you to repay some or all of the advance if the IRS doesn’t pay the full amount expected.
Non-recourse agreements typically offer lower percentages because the buyout company is taking on more risk. Recourse agreements might offer higher percentages but leave you exposed to potential repayment obligations
Red Flags to Watch For
Be cautious of agreements with vague language about fees, no clear statement of who handles IRS communications post-closing, extremely high percentages that seem too good to be true, or pressure to sign quickly without time for review.
Questions to Ask Before Signing
- What is my total net payout across all payments?
- When exactly will I receive each payment?
- Is this recourse or non-recourse?
- What happens if the IRS adjusts my claim amount?
- Who handles IRS communications after closing?
- Are there any additional fees beyond what’s disclosed?
Comparing Offers
If you’re evaluating multiple buyout providers, create a simple comparison chart. Look at total net dollars you’ll receive, upfront amount and timing, holdback terms and conditions, and risk allocation.
The highest percentage doesn’t always mean the best deal. A transparent provider offering 85% with clear terms and non-recourse provisions might be better than one promising 95% with hidden conditions.
Understanding these terms empowers you to evaluate ERC buyout offers critically and choose the option that truly serves your business’s best interests. You can also check out this article that explores whether the ERC Buyout is right for your business
Want to learn more about our ERC Buyout offer – Give us a call at – 941-451-5634