While the basic deal price model is simple (i.e. when an all cash deal leads to a lower price and less cash; more financing leads to higher price) our goal is to work with the “pieces” of a deal structure that make a difference in the overall transaction value to the Owner.
- Typically structured as a percentage of deal value.
- Or, to hit a round number like $2M sound better than $1,999,000.
- The stock portion of the transaction is calculated based on the share value formula identified and negotiated for the final sale agreement.
- Stock goes up as well as down so the stated stock benchmark price is a critical part of the process. All public companies will model deal based on stock going up. Obviously this works if the initial stock offering is priced below market price.
- Typically after a significant successful transaction, stock will be positively impacted in the short run.
- The negotiations process to determine how much of the stock is free-trading versus hold periods, should be specifically addressed early in process.
- The strength and the merit of the stock issuer will drive the strategy for addressing the stock portion of the transaction value.
- This provides the Buyer some form of control to keep the Vendor at the table and interested in the outcome and future success of the business after the deal is done.
- This allows the Buyer to hold back some of the VC balance owing if material differences arise going forward i.e.: Vendor represented next 12 months would generate $5m in sales and the new Owner only gets $4m in sales. The Buyer has some leverage to renegotiate the deal and hang onto some of that cash.
- The VC funds and control of those funds saves the Buyer legal hassles of trying to claw some money back if the Vendor turns around and spends it all or moves it out of easy legal reach.
- The VC amount is normally linked to some mutually agreed milestones (i.e.: performance or date) which allow the Buyer to show his investors or management or shareholders they have negotiated the best deal. Note: This is not the same as future performance bonus.
- This can reduce Tax consequences by deferring some chunk of cash to the next tax year. Note: in some cases this leads to very significant tax savings.
- This can allow the Vendor to structure a higher price by having the purchase price increased to reflect the risk of not receiving the cash on closing. This becomes very good leverage when the Buyer is using next year’s cash flow to pay off the purchase price.
- During the term of the VC the Vendor can insist on having access to regular financial statements to allow Vendor to be aware of how the business is performing. If business is in line with proforma everyone will be happy. If Buyer starts stripping out assets or cash, the Vendor will know about that sooner than later. A good Sale Agreement will provide protection to Vendor if that becomes an issue.
Every Buyer expects a certain amount of Vendor participation to assist the new Owner in moving the company forward. The time frame should be negotiated early in the process to avoid any misunderstandings on expectations.
The working capital calculation will peg the amount of cash or cash equivalents that are considered necessary to include in the structure of the transaction. No Buyer wants to write a check to the Vendor and then start writing checks to operate the company unless the price has been discounted to make up for the shortfall and working capital.
Some business owners leave redundant amounts of cash in the company for a rainy day. This Redundant Capital (RC) calculation must be established and planned for outside of the transaction value. This may create tax consequences for the Vendor which should be identified and planned for early in the process.
Redundant capital is normally removed prior to transaction closing date.
Cash + Stock + Stock upside + VC + EO + salary/compensation terms + performance bonus = TV + RC.