What is a Business Deal Structure
After our business brokerage experts have thoroughly investigated all aspects of a business as part of our initial due diligence process, and the client is satisfied with what the process has put together, we embark on the best possible deal structure for our clients – be it buying or selling.
Even though several advantages can be gained or lost depending on how a deal is structured and how the negotiations go down, this is arguably the least talked about part of buying and selling a business. Even in the brokering space, very few actually give heed to structuring a deal for success.
What are the Tax Implications of a Deal Structure
This is surprising as the type of deal structure you get while selling or buying a business is key in shaping your tax implications.
Whether the deal is a buy-out, an asset transaction, a stock transaction, a merger, or an acquisition; the type of deal will determine the amount of taxes you need to pay.
Getting the structure right is important as a sale and purchase agreement is typically a zero-sum game – a deal structure that favours a buyer from the tax perspective normally is detrimental to the seller’s tax situation and vice versa.
That’s where our business brokerage experts come in.
What are the Types of Deal Structures
In the world of business buying and selling, there are three main transactional deal structures:
Mergers and Acquisitions
An asset purchase involves buying the business’s assets, such as equipment, inventory, and facilities; while a stock purchase means buying shares/equity only. A merger/acquisition is where two business entities combine to become one legal entity.
What are the Advantages of Deal Structure
Whether you are selling or buying, you’d always want the best deal. While selling, a good deal structure could get you more profits from your asset. While buying, it could make the asset purchase more profitable, less risky and far easier to operate.
Always remember that while some deal structures are good for both sides, in majority of the cases, a particular deal structure is slanted in favour of either the buyer or the seller.
How to Structure a Deal
Selling a Business
When you plan to sell your business or look to give up equity for new funding/investments into the company, we help you prepare a strategy so that you get the best price possible while continuing to run and grow your business. We apply various valuation techniques to ensure that your price is appropriate for the current market condition – neither too low nor too high, with attractive investment potential. We also assist you during the transfer period to make the change of ownership as smooth as possible. But most importantly, we propose and work out the best possible deal structure for you – the seller.
One such structure is known as the Seller-Retained Equity. Under this, while the seller sells off the majority of their business to the buyer, they still keep a portion of it. This way, while the buyer can utilise the seller’s expertise – who actually made and grew the business; the seller can also reap some benefits of a growing business while still getting a lot of his equity liquidated into cash.
A variation of this is known as In Perpetuity, which means that the seller is continuously getting paid by the buyer even after the buyer has paid the full price of the business. This normally happens when the skills that the seller possesses are difficult to hire out, or involves a skill set the buyer just does not have. Buyers are also comfortable with such arrangements – keeping the seller on board in perpetuity for their skills – so as to ensure that the business doesn’t suffer.
Investor and Operator Partnership
A unique deal structure which advent can be attributed to the growth of businesses is known as an investor and operator partnership.
Some entrepreneurs with experience in running successful businesses but lack the required cash to make the acquisitions required for exponential growth; can tie up with investors with big cash flows. Together they can take the business to the next level. The operator forms an agreement with the investor where he gets some equity in return for the capital investment.
Balancing Risks While Structuring a Deal
Whether you are a buyer or a seller, the level of risk you’re comfortable with will determine your approach to structuring a deal. Sometimes the best option is to split the risk in such a way that both parties get what they want.
A commonly practised approach is where a deal is structured as an earn-out; the seller gets paid over a period of time after the buyer has purchased the business, alleviating some of the risk to the buyer in that he is not investing all of his capital at once. The buyer can use his remaining funds as operating capital to help grow the asset he’s bought.
Contact our Team:
COO & Co-Head,
Co-Head, Business Advisory
Outsourcing & Advisory
Structure a successful deal
Let us steer your business through every stage of the buying and selling process. From strategy to due diligence to integration or divestiture, we help you increase your probability of success and close the deal.