Assessing offers
Q: Assessing offers on the basis of the deal structure and the seller’s responsibilities and liabilities?
Once you have decided to sell your business, chosen an adviser and have hopefully secured a number of offers, it is time to sit down and evaluate the offers on the table. As tempting as it often is to focus on the “headline price” and concentrate on the highest offer, it's important to look at the detail and understand the overall structure of the deal.
It is rare in today’s market to receive offers without some element of structure being put in place. Deferred Consideration, Earn out, and share exchanges are all becoming more common place in offer letters and Heads of Terms, so what are the key factors to consider with each of these?
Deferred Consideration (DC)
The most common form of structure requires the seller to wait for part of the consideration to be paid, typically six months, but it could be as long as three years until all the consideration is paid over. The key thing to consider is the quantum and the likelihood of payment. Are there other stakeholders who will be paid first, or have some form of security that you haven’t got? Can you get security or some right to recourse if there is a default on the payment?
Earn Out
Should the deferred element be contingent on the performance of the business it is referred to as an “earn out”. The factors to consider when assessing this type of structure are similar to those in respect of the DC, however there is an additional risk of the business achieving the targets set, do the sellers control the performance or are they reliant on the buyer or another third party?
Share for share exchange
The final form of structure is likely to be in the form of shares in the buyer or a reduced shareholding in the business being sold. The key risk here is the ability to sell such shares in the future and the value that is likely to be received. As with the Earn Out model the ability to control / influence the performance of the business or the value of the shareholding in future years may be limited, so too the size of the buyer pool for the shares.
In summary, always take time to fully understand the structure of any deal that is proposed and consider the risk factors involved and the triggers which ensure full value is received. Cash is king, but with careful thought and good advice a structured deal can still offer an attractive exit for sellers.
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