No two companies are ever the same, as is the case with their owners. For this reason it makes no sense to adopt a ‘one size fits all’ approach when it comes to deal structures as a solution which may work for one company and the personal objectives of its owners may not be suitable for another.
There are many exit solutions available to ensure the best interests of both the owner and the company are served. The list of deal structures below does not by any means cover all available solutions, but they do represent some of the most common:
Cash on completion
Cash in full on close deals are often achieved. Acquirers gain immediate ownership and sellers are happy as there is minimum financial risk. An all cash deal is ideal if you are retiring or want an immediate exit.
Elevator deals are for ambitious sellers – ‘cash-in some of your chips and keep playing’. Such deals provide a mechanism to link the acquisition price of a company to the potential future levels of its profits. The Sellers on-going involvement is required in order to drive and elevate future profits and value. This has the potential to truly maximise value and is ideal for companies in the infancy growth stage, young and ambitious sellers, and entrepreneurs.
This concept is exciting for those who have worked hard to build a company and want to both de-risk and ‘keep a hand in the game’.
Performance related payments
An initial consideration is made on close and then secondary performance related payments are made subject to certain performance caveats. You can maximise the deal by linking it to future growth and the buyer can ‘hedge’ risks and finance the deal from future profits.
These are effectively performance related payments, where the seller is expected to stay on and work to achieve the PRP through work on a service contract. The idea is that the seller has a financial incentive to help make a success of the company after the sale.
Deferred and contingent payments
Deferred payments are fixed and carry interest at an agreed rate. They may be secured by acquirer guarantees and in some cases by bank guarantees. Contingent payments, or earn-outs, are often linked to the future profitability of the company. These can be risky and should be seen as ‘the icing on the cake’ for risk averse sellers.
A combination of two or more companies, resulting in the creation of a new entity.
Benchmark International’s Corporate Finance Team works closely with clients to gain a thorough understanding of their objectives and negotiate deals structured in a manner that best suits those objectives. Correct structuring is hugely important to ensure the overall attractiveness of a deal for the business owner. It can very often be the case that one deal which has a greater overall value is not the most attractive deal as it may rely heavily upon performance related targets.