‘Dark Arts’ – How acquirers structure deals.

Structuring a deal is often likened to a ‘dark art’ and for good reasons. In essence, an acquirer will tend to keep their cards close to their chest when structuring any offer to buy a business. This is best practice in terms of negotiation, and frequently it is simply as common sense dictates: no buyer would ever put their best offer in first.

Acquirers tend to want to factor in a certain amount of risk mitigation in their deal structures or create incentives for sellers to safeguard the medium-term success of the company. Equally an acquirer may be subject to institutional lending requirements, and/or scrutiny from an overseas parent company or investment committee.

Importantly, trends in deal making have influenced how deals are structured; these days unstructured 100% cash on completion deals are becoming increasingly rare. Undoubtedly, transactions like this can still happen on occasion, however, when deal structures reside solely in the hands of the acquirer it is unlikely.

Whatever the acquirer’s motivation, company owners still, quite rightly expect to be paid most of the sale proceeds upfront andHow acquirers structure deals. buyers quite rightly, will negotiate hard to extract as much value as they can from the transaction. That said, there can be a lot of flexibility on both sides of the table, especially if the synergies deliver significant value and return on capital employed.

A recent round of deal negotiations led by Mike Whittle, Managing Director of EvolutionCBS, is a good example. Having agreed to exclusivity with the prospective purchaser, on the basis that the headline deal value exceeded our client’s expectations, the actual structure equated to 80% cash on completion for Shareholder A, 75% cash on completion for Shareholder B and 75% for Shareholder C.*

All shareholders were delighted with this outcome, especially as not all of them wanted to exit early doors, and likewise, the acquirer was pleased to have sealed the deal. The remainder of the transaction was structured as a mix of short term deferred payments, contingent on the future profitability of the business, plus shares, through a dilution of equity mechanism.

Note what the acquirer has done here: they have won the trust and confidence of the exiting shareholders by ensuring that they achieve what they desired in terms of headline monetary value on day one. Equally, to manage capital outflows they have staggered the disbursement of the completion elements by utilising a mix of cash and shares, plus introduced further incentives with a profit-based performance target.

Why would an acquirer use shares as meaningful consideration, in lieu of cash one may ask? Firstly, the issuance of shares is a sign of great confidence on the part of the acquirer in the departing shareholders, who could have a valuable role to play in helping the company succeed in the early days post-sale.

Secondly, acquirers will always seek to spread the risk in any transaction, by ensuring that the departing shareholders carry some of the burden of responsibility through holding shares, with the promise of a future upside in the form of dividends and ultimately, to benefit from a further buyout, at some future date.

As an aside, this is where the right advisor can prove their worth, in being able to recognise the mutually beneficial, strategic features that create the right conditions for a deal; one that should reflect a commitment from both parties to the longer-term success of the business post-sale.

Lastly, there is in reality, no dark art to structuring a deal. When it comes to it, a company owner can do nothing better than prepare well in advance for the sale and should never enter into negotiations blindly, but with the right advisor at the table, who can ensure they achieve the best possible valuation with the best possible deal structure.

 

For a confidential conversation on what’s involved in selling your business and the outcome you can expect, please email:  info@evolutioncbs.co.uk or contact us on Tel: 0118 959 8224.

 

*Note: This example deal has been anonymised with some facts changed to protect the seller’s privacy.

 

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About EvolutionCBS

 

EvolutionCBS is a long-established, premium provider of business sale advisory services with an enviable track record of international transactions. We work with the owners of UK businesses in any sector and any region, finding buyers from around the world through highly targeted research and supporting our Clients with dedicated Director-led teams, at every stage of their journey to a successful sale.

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