How to structure your deal when buying a business?

Structuring a business deal is a necessary process where a set of terms and conditions are specified to conclude the acquisition. The key objectives of a deal structure are to provide the seller all the required information, including the desired remuneration for the business as well as ensuring the ones who buy the company are in line with the financial objectives. Even though the price of the deal is one of the most important elements, no sound deal structure is made of the cost only. Let’s take a look at the other essential elements which are included in the deal structure of business acquisition.

Seller’s Financing terms

Seller’s financing is a process whereby the seller offers a buyer to take a loan to cover the portion of the price of the business. Firstly, when the deal closes, the buyer makes a down payment for the agreed amount mentioned in the contract, the other part of the agreement can be covered by a loan. The loan includes the remaining sales price plus the interest rate, the amount of which is up to the lender to decide.  

Is it structured as an asset or stock sale?

Structuring a deal as an asset means the buyer obtains the underlying part of assets without its liabilities. This is the most common acquisition structure for small businesses. The buyer acquires the assets that are required for business operations, which assumes no financial obligation whatsoever. Unlike assets, structuring a deal as a stock sale means acquiring all of the outstanding stocks in the company. The new owner of a business has control not only over the assets of a company but liabilities as well. 

Earn-Out Deal 

In the earn-out deal, a buyer pays the purchase price at the closing of the deal. In contrast with the direct sales deal, the buyer and seller have “consulting” clauses, in which the seller is obliged to stay with the company for as long as it is stated in the clause, to help the buyer throughout the transition phase. S(he) helps run the business and earns the remaining part of the acquisition deal. An earn-out allows you to ask for more money than you would have asked for if the buyer could pay all cash. It also helps you stay in partially in control over the business making sure the new buyers don’t tear it apart or deviate from your vision too much. 

Other Clauses

In addition to all of the key elements mentioned above, there are several different financial requirements, which affect the viability of business deals. Some of these elements include the payback period of the buyer’s down payment or the schedule of the remaining balance to the seller. There can also be an indemnification agreement, which means the seller is obliged to reimburse buyers’ extra costs if the business fails to meet the warranties mentioned by the company owners.

All in all, structuring a deal when buying or selling a business is a tough job requiring legal assistance to prevent any misunderstandings in the contract. As a buyer, make sure you are aware of all the implications of the business deal, including both legal as well as financial consequences. In general, the best option is to have counselors helping both parties with legal matters so that you will have more time to pursue your business goals.

February 28, 2020

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