As a founder, you’ve poured your heart and soul into building your business. Now, when a potential buyer, especially a private equity firm, presents an offer, it’s essential to understand the nuances of the deal structure. In many cases, the offer won’t be an all-cash transaction at closing. Instead, it will involve a mix of cash and other components, collectively referred to as “structure.”

What is Deal Structure?:

“Structure” in a business sale refers to any element that is contingent or deferred — anything beyond the initial cash you receive at closing. This could include a seller note, an earn-out arrangement, or rolled equity in the business. While these structures may not provide an immediate full payment, they can offer strategic advantages based on the unique circumstances of the deal.

Seller Notes and Deferred Payments:
A seller note is when the you, as the seller, also act as a lender, helping the buyer with a portion of the purchase price. This involves the buyer making payments to you over time, potentially with added interest, either when they sell the business again in the future (the “second-bite”) or at a later agreed-upon date. It's important to know where this your note stands in the capital stack, compared to other debts, like bank loans, should financial issues arise after the sale. Understanding when and how you will be paid back is crucial, as it affects the risks involved.
Earn-Out Arrangements:
Earn-outs involve extra payments for sellers based on specific conditions, like performance metrics or the passage of time. As the seller, you might agree to this setup if you think the business can reach goals outlined in the agreement, particularly under the new buyer's management. It's crucial to realize that with an earn-out, you won't directly influence the business's performance anymore, and you need confidence in the new buyer's capability to successfully meet the specified financial metrics, especially if tied to EBITDA (earnings before interest, taxes, depreciation, and amortization).
Retaining Equity:
Retaining equity in the business lets sellers share in its future success. Even though this might mean not getting the entire purchase amount at once, it can be beneficial, especially if the buyer is a well-regarded private equity group with a history of success. It's essential to evaluate the buyer's capabilities and your confidence in their ability to lead the business forward when deciding whether to retain equity.

Risk Mitigation and Considerations:

When evaluating structured deals, it's essential to think like an investor. Consider the risk associated with each component and weigh it against the potential benefits. Factors such as the buyer's track record, the business's performance post-sale, and the terms of deferred payments play a significant role in making an informed decision.

Structured deals are not a one-size-fits-all solution. Sellers must carefully analyze the terms and conditions, considering their confidence in the buyer and the overall risk profile. By approaching structured deals with a strategic mindset, sellers can navigate the complexities of business sales, ensuring a mutually beneficial outcome.

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