If ‘Cash is King’, is Deal Structure Queen?

‘Cash is King’ is an often-used phrase in mergers and acquisitions circles, particularly as advisors are keen to deliver maximised valuations for their vendor clients. If the saying that ‘Cash is king’ is true, then ‘Deal Structure’ must be Queen. A company valuation can be compelling, but if the fundamental deal structure is unfavourable to the vendors, it follows that the parties will struggle to complete.

For example, one cautionary tale involved a shareholder, who one week before completing the sale anxiously contacted an M&A advisor to complain. The main issue was that despite the sale price being acceptable, there was never any mention at any stage, of when she might be paid post-completion. Handing over ownership of her business, under those terms, would have been the stuff of nightmares.

Although an extreme example, this does highlight that when selling a company the ‘how’ and ‘when’ you are paid, are as important as the overall deal value itself.  Big numbers and multiples can be thrown around by M&A advisors, however, an owner should consider the advisors’ experience/track record of structuring deals that protect the best interests of the departing shareholders.

On balance, a ‘Cash is King’ mindset is right, but can unwittingly ignore some important upsides for the departing shareholders. Upsides that could include taking Equity – or shares issued by the acquirer – in a NewCo, or their existing organisation, that can yield future dividends or deliver significant additional value through a further sale or IPO.

In the right settings, deferred elements, such as earn-outs, retentions and other related mechanisms can deliver significant additional value. This especially applies if the cash-on-completion element surpasses the owner’s expectations on day one and there’s substantial upside growth potential in the business in which the departing shareholders are happy to participate. Crucially, it is down to the skill of the sell-side advisor to ensure that any future payments are delivered within a reasonable timeframe.

Should an owner choose to remain within their business post-sale for a period of time, further pecuniary benefits could be agreed, such as ‘golden handcuffs’ – payments that secure their exclusive participation within the acquirer’s business in future, or consultancy fees to achieve the same effect.

Ultimately, business owners should rely on the wit, skill and expertise of their sell-side advisor to secure both the best possible company valuation and a favourable deal structure. This way a vendor can be certain their best interests are protected and that they are not giving away the keys to the kingdom.

 

If you enjoyed this blog, it’s not too late to join our expert-led Masterclass session on 5th May, where you can discover what it takes to successfully sell your business.

 

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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. https://www.evolutioncbs.co.uk

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