It’s About Deal Structure in M&A

/in , /by Exit Strategies

Sometimes we work on the buy-side, helping strategic buyers and financial sponsors find and execute acquisitions. For one buy-side client, we approached a seller with what we thought was a fair offer, but the seller wanted more. We talked it over with our client and decided we could come close to the seller’s number, provided we got a specific deal structure.

We arranged the deal with about 60 percent cash at close and 20 percent seller financing at a six percent interest rate, amortized over 15 years with a five year balloon payment. Seller financing reduces the amount of cash you have to bring to the closing table and keeps the seller invested in the business. The final 20 percent was structured as an earnout tied to gross profit. This mitigated some of the risks in the deal, which in this case were customer concentration issues and the fact that the owner was the primary relationship manager with a few top accounts.

For the seller to get 100 percent of the earnout, the company has to reach a threshold level of gross profit from existing customers based on the last two years performance. If those customers defect or decline, the effective purchase price declines. The earnout will be earned in the first year, but paid out over the following four years under the same terms as the seller note.

The difference between the buyer and seller’s original numbers was 20 percent. Our client was able to come up 15 percent with the aforementioned change in structure. None of the increase in value went to cash at close; it all went to seller financing and earnout.

The point of this illustration is that sometimes you can pay more if you get the right structure. Structure is almost always more important than price at the end of the day. Too many buyers and sellers get stuck on price and walk away from good opportunities without exploring creative deal structures.

This transaction will be a win-win for both parties. The seller will receive good value and the buyer  feels confident the deal will work for them too. They will have enough cash flow to service debt and reinvest in the business for future growth.

For advice on exit planning or selling a business, contact Al Statz, founder and CEO of Exit Strategies Group, Inc., at alstatz@exitstrategiesgroup.com.