One of the most important elements for business owners to understand before embarking on a sale process is how their deal likely to be structured. Questions abound, including:
How much of the valuation will I receive on day one?
Will there be an earn-out period and how does it work? And what are the risks of an earn out?
What if the acquirer does better than expected out of the deal because my business and I add so much value as part of their group? Does that mean we have undersold?
There are countless possible deal structures, each quite rightly tailored to the individual circumstances to address concerns like those above. Of course, the buyer will have their own perceived risks they will want to cover, not least their desire to ensure a smooth transition whether the seller is looking to exit asap or pursue a career within the new group.
And there is almost always a time versus money trade off in any deal. As in, the faster a seller wants to exit and the less time they are prepared to commit to meeting growth targets post-transaction, the less a buyer will be inclined to pay overall.
So how is this balance being addressed in the real world of M&A?
Well a number of Symmetry’s recent deals have been based on a deal structure that works for all parties precisely because it achieves balance between risk & reward:
Majority of value paid in cash on completion
plus
Performance based annual Earn Out payments
plus
Equity in the group business
Several of our recently announced transactions have followed this structure, in sectors including SaaS, FinTech, Facilities Management, Media, Communications Hardware and more.
Let’s take each element one at a time:
Majority of value paid in cash on completion
This is typically a seller’s priority – and for good reason, given that they will be ceding control of their most important asset. The accumulation of their life’s work and source of ongoing earnings. But it is also risky having so much capital tied up in a business which can be susceptible to unfortunate market turns. In any case, sellers should seek to ensure that the completion payment is sufficient to reflect the strategic value of the business, as well as sufficiently derisking their investment. In other words, whatever else happens post-transaction you should always be able to look back and feel the sale was the right thing to do.
Performance based annual Earn Out payments
A source of great potential value for a seller. Most earn outs are achieved in full, if key conditions are met in the contracting phase. Specifically that the growth projections put forward in the negotiation stage are realistic, the performance metrics are right and the seller has key contractual protections in place. The subject of negotiating Earn Outs for maximum value and minimum risk is a deep topic in itself (our next blog perhaps – give us a call if you would like to discuss directly), but I would always counsel that Earn Outs are not to be feared and can deliver significant upside over and above present value, usually a transition period where the seller continues working in the business.
Equity in the group business
Many acquirers will recognise that utility of equity in incentivising management teams to contribute to the growth of the group, pooling efforts with the existing team. The nominal value of the equity should convert into significant upside in the longer term. This is very much a preferred method of incentivisation when the group company is backed by Private Equity with a plan to ultimately sell the group for maximum value.
It’s not hard to see why this ‘Triple-Decker’ structure is proving so popular. It reduces risk and maximises potential returns for all parties by taking account of current and future strategic value.
Call the Symmetry team (03330 164 130) or email us any time for a no obligation conversation on how deal structures can be tailored for you.
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