Transaction Structure is as important as valuation

We assist dozens of business owners each year with important M&A projects, and in many of those cases, we are assisting them with an exit or sale of their business. Invariably, clients begin these projects with an expectation regarding the ultimate valuation achieved in the company sale, often based upon their own industry research. As we start every project with a detailed valuation, we make sure there is alignment between our client’s valuation perspective and ours. And, importantly, we consider what transaction structure is likely. That is, how much cash is exchanged at closing, and if not 100% of the transaction value, what risks exist for the seller in receiving the balance of the proceeds.

Our goal is that our clients Realize Full Value for their business, so we focus on what might be certain, and what risks remain

As we are experts in the middle market, our client businesses are often smaller, with risks of management continuity and concentrations of revenue or supply. As a result, buyers often attempt to manage their risks by crafting a structure that adjusts what consideration is ultimately paid if certain negative events occur. Conversely, if not all transaction consideration is paid at closing, with some risks of non-payment being retained by the seller, this needs to be examined carefully to understand what risks our client continues to face.

We believe that a business value should be reflective of its historical performance and growth attributes. There is far greater nuance to how value for the potential, anticipated accelerated growth or acquisition synergies realized by a buyer is factored into business value or transaction structures.

We measure the transaction structure risks in the context of the future success of the business, and, in the unlikely event that the business struggles after the transaction. Our experience as commercial lenders gives us practical insight into what can happen to equity or subordinated debt holders when companies have financial and operating problems. When combined with an appreciation for what voice the seller has in the ongoing business, we can provide the best possible advice to our clients on the risks of the transaction structure. Will the seller have adequate control of the performance variables to adequately benefit from the deferred consideration? Is the seller an operating manager or retired? Is the deferred consideration debt or equity? Are there other more senior debt holders or claims? Is there some liquidation preference? If retired, does the seller have visibility into the activities of the business?

If faced with receiving only a modest portion of the transaction value in cash at closing, we might well recommend that client consider other exit alternatives, rather than moving ahead and retaining a large portion of the economic risk of ownership. There are a variety of strategies that a seller might pursue in advance to make the business more institutionalized – less susceptible to the continuity risks of management or concentrations of client revenue. A more institutional business often sells for cash consideration, rather than cash plus deferred consideration.

Ultimately, the best way to manage these outcomes is to consider the likely valuation and transaction structure possibilities and to discreetly approach a number of possible buyers simultaneously, so you create a competitive process. It is only through this process will you get visibility on the real market value for the business and push potential buyers to the most attractive transaction structure achievable.

Realizing Full Value

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