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Structuring & Financing Business Sales/Acquisitions

Perhaps you’ve contemplated acquiring another business but discounted the possibility because you’ve assumed you wouldn’t be able to finance the transaction. Yet there are many ways in which business sales/acquisitions are structured that can help aspiring acquirers. Being aware of the available options might open your eyes to the possibilities of growing your business by acquisition. It’s also important to be aware of the structures often used if you’re thinking of selling a business.

The structures used in many business sales/acquisitions mean that the entire purchase price isn’t paid at settlement. In some cases, the amounts to be paid in the future are contingent on future circumstances (such as performance of the business). Whilst there are many reasons for a buyer to negotiate deferred and/or contingent consideration in a deal, one of them is to effectively finance part of the deal.

Primary financing/structuring tools include:

Earn-outs (contingent payments)

These involve a component of the purchase price being dependent on the business’ performance after the sale is completed. Whilst earn-out payments are “at risk” they can bridge pricing gaps especially where the business is in a strong growth phase and the vendors want to receive financial recognition for their part in this. Of course, earn-outs also provide incentive for vendors to maximise the performance of the business after the sale – this is especially relevant where the vendors are also management and earn-outs can also be useful in aligning the interests of buyer and seller for a period.

Vendor finance (deferred payments)

This is where payment of an agreed portion of the purchase price is deferred until after settlement and enables the purchaser to utilise any excess cash-flow from the acquired business to fund those payments, in whole or in part. It is particularly useful in transactions where the purchaser is unable to access enough funding from its own resources and traditional sources. Addressing certainty of payment is especially important for the vendor in providing vendor finance.

Partial sale/purchase

Another option is to buy/sell only a percentage of the business. The agreement would usually include contracted arrangements about the purchase/sale of the balance.  These arrangements typically range from a firm contract to acquire/sell the balance on agreed terms at a future date (e.g. at an agreed dollar price or using a financial formula) to put and/or call options or simply a last right by the purchaser to match any other offer the vendor may receive from a third party. Ongoing management and control of the business prior to any full sale/purchase are of course critical issues that need to be agreed up front.

All of these structures are negotiated in detail as part of the original transaction but they will continue to be important after completion so it is vital they are fully understood and agreed by all parties. They are not always mutually exclusive; for example, an earn-out may have a guaranteed minimum which makes the guaranteed component, in effect, vendor finance. There is a myriad of nuances that can make a substantial difference to the final outcome.

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