When it comes time to sell your company, it is important to be prepared. After all, you only have one chance to get it right. By familiarizing yourself with the various inputs into deal structures, you can maximize value and secure the best agreement for you and your company.
Here are the key components of deal structure to consider:
Selling your business is likely to be the biggest liquidity event of your life, and cash is the top priority. Unlike deals involving larger publicly traded companies, where structure tends to be more complex, middle market deals among privately held companies tend to emphasize upfront cash as the main consideration. For a variety of reasons, however, deals often require other components...
To align the seller’s interests with the buyer’s, some deals include rollover equity. This reduces a buyer’s upfront capital investment and positions the seller to benefit from the company’s future success, including exposure to another potential liquidity event. By taking equity, the seller is offering a vote of confidence on the direction of the company. Rollovers may include equity not only ownership but also key managers and investors.
Similar to rollover equity, earnout is a way for a seller to remain focused on operations through the sale and potentially beyond. The seller receives compensation for meeting certain targets around, say, revenue or EBITDA. Earnouts can be paid in cash, equity or a combination of the two.
Here, the seller finances a portion of the sale by accepting some compensation at a later date with a note on the business. A seller note is especially useful if the buyer and seller are having difficulty agreeing on a price, making the buyer more comfortable with paying a higher price. Interest is typically accrued on these notes.
An employment agreement is a creative way for a buyer to retain the expertise of ownership and/or key employees while reducing upfront deal cost. These can be in the form of salaries or consulting fees over a specific period of time and often include non-compete agreements.
There is no shortage of tools that can be used for structuring a fair deal for both sides. For those simply looking to sell and move on, upfront cash tends to be a top priority. On the other hand, more flexible owners may be able to negotiate a higher price by opting for equity, accepting an earnout, holding a seller note or signing an employment agreement. Deal components are not a one-size-fits-all approach.
To arrive at the most appropriate solution for your business, be sure to consider these options in advance of negotiations, and be cognizant of what buyers are looking for. Experienced sell-side advisors can help frame these deal components in a manner that places your interests first. With adequate preparation, your company will be positioned for a successful deal.
Scott Chapman is a co-founder and Managing Director at Copper Run. He specializes in serving companies in the consumer and industrial, technology and business services sectors.