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M&A Transaction Constructs
Once the discussions are moving forward, you enter the development of a deal. Driven largely by your M&A advisor, this period is where you bring your desires, needs & values to the forefront to create the best deal for you. This is where you have the opportunity to exploit the intangibles and more qualitative elements of your business, such as ensuring the buyer is understanding long term impact of your technology platform, or understands the ability of the business to scale quickly through the buyers channels. Components of a deal A number of different components make up the compensation construct of a transaction: cash, earn-out, retention bonus’s, executive & employee compensation agreements, stock/equity, and more. We must note that every transaction is different and guided by how the buyer views the company and how they prefer to structure acquisitions. As a general rule, the seller and M&A advisor should work early-on assessing transaction structure alternatives so those can be conveyed up front when negotiating a deal.
These can come in the form of cash, stock/equity, or a combination and will be time based, milestone based, achievement based or a combination of several. Preferably you would minimize earn-outs or earn-ups, but in some cases these can provide a means to bridge the gap between a buyer and seller’s relative valuations. The key to these components is a rigid structure upfront as to how the company will operate and performance against the earn-out metrics will be measured. This takes a bit of negotiation and creative ‘outside the box’ thinking. There are a few tricks and methods which ease the tension in establishing these metrics. Structuring the Transaction: Typically there are three types of deal structures. Each has their benefits and drawbacks for both the seller and the buyer. It is imperative you assess all options with your M&A advisor, accountants and lawyer when structuring an acquisition, as some of the implications (for instance taxation) can be embedded and not readily visible, nor understood. Early understanding of what works and is best for the seller and buyer is important to assist in guiding the terms of the relationship from the start. These include Asset Acquisition, Stock/Equity Acquisition and Merger/Restructure. More on these can be found here: Types of Deal Structures Although transactions are complex, it is important to keep the principles simple & clean. By positioning your company up front then exploiting the value during the marketing process, and being flexible in deal terms until you have the whole picture, you can raise your return. Combining several components constructively can be a win for all (close consideration, earn-out, retention bonus for employees, and roll over equity). Example Deal Transaction Scenarios When examining types of transaction, they are often broken down into strategic, financial or financial with a strategic vein. More on these can be found here: Types of Buyers Strategic Sale: This is typically a 100% sale of the company. It usually comes with cash or cash + equity, with employment agreements to facilitate transitions and an earn-out/up opportunity for the seller. Often it can be facilitated to include an employee retention pool (something this firm/TKV6 is a great believer in), a monetary incentive to continue to engage employees following the transaction and reward them for their efforts. Example elements of a transaction:
Majority Sales to Strategic: A more rare transaction, this is a 51% - 100% sale of the equity of a company. It can allow the company to continue operations unabated once the acquisition has closed. The company maintains independence with a structured goal that the company will be liquidated in the future. This ensures that the business owner can easily secure wealth of their portion of the entity down the road. These scenarios have elements of a strategic sale as well as elements of the following financial investor model. Financial Investor / Private Equity Transaction: This is a sale of the majority of the company and generally includes equity retention by the owner, often leaving the owner with more equity than anticipated. These deals are often structured to acquire the majority of a company and infuse operating capital and building leadership to drive the business to the next level. The objective is to position the resulting entity to be able to aggressively grows (15%-30% per year) over the next 3-7 years (typically) with full expectation the company will be sold when it reaches a certain goal. Example elements of a transaction:
It is not uncommon for a business owner who has spent years building a software or IT services company to embark on a transaction of this nature and receive as much, if not more, from the “second bite of the apple” as he took home upon the first sale to the financial investor (with a strategic vein).
“I have never cared what something costs; I care what it’s worth.” – Ari Emanuel, co-CEO of William Morris Endeavor Each deal comes with pros and cons, but in each type of transaction you can support your goals as a seller if the transaction is approached properly. DEALS ARE COMPLEX. There is much much more to it than these 60,000ft examples prevail. Should you want to retain operational oversight, hold shares, or receive a large buy out, all are possible. Discussing types of sales with your M&A advisor makes certain your values are put first in any transaction, ensuring considerable success in any deal.
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