M&A Essentials: Crafting a Solid Deal Structure

The Art of Structuring a Business Sale: Strategies for Sellers

In business sales, the structure of a deal is just as critical as the sale price itself. A well-structured transaction ensures a smooth transition, allocates risk effectively, and maximizes financial outcomes for both parties. Below, we explore various deal-structuring strategies, their potential impacts, and key considerations for sellers looking to achieve a successful exit.

Financing the Sale

Seller Financing

In some deals, sellers may finance a portion of the sale price, offering a loan that the buyer repays over time. This structure can attract buyers who may not have full financing upfront, making the deal more feasible. However, it also introduces risk, as the seller’s payout depends on the buyer’s ability to successfully operate the business. Sellers considering this option should conduct thorough due diligence on the buyer’s financial standing and industry experience before agreeing to extended payment terms.

Third-Party Financing

Buyers often secure funding from external sources such as banks, private investors, or Small Business Administration (SBA) loans. While this minimizes direct seller involvement, it is crucial to structure the deal to accommodate lender requirements. For example, lenders may impose financial covenants or require seller earnouts to bridge valuation gaps.

Earnouts

An earnout ties a portion of the seller’s compensation to the business’s future performance. This structure benefits buyers by reducing upfront costs and incentivizing sellers to support a smooth transition. However, sellers should ensure clear, measurable performance metrics and define how financials will be reported to avoid disputes.

Equity Rollover

In some acquisitions, buyers offer sellers an equity stake in the new entity instead of a full cash payout. This is common in private equity transactions and industry roll-ups. Sellers who believe in the company’s long-term growth potential may benefit from this structure, but they must assess factors such as dilution risk, decision-making rights, and exit opportunities.

Key Consideration: Before agreeing to an equity rollover, sellers should analyze the buyer’s growth strategy and track record. If the acquiring firm has a history of value creation, rolling over equity could lead to significant upside. If not, sellers risk holding illiquid shares with uncertain returns. In some acquisitions, buyers offer sellers an equity stake in the new entity instead of a full cash payout. This is common in private equity transactions and industry roll-ups. Sellers who believe in the company’s long-term growth potential may benefit from this structure, but they must assess factors such as dilution risk, decision-making rights, and exit opportunities.

Due Diligence and Risk Allocation

Structuring a deal also involves outlining the buyer’s due diligence process and defining representations and warranties. Buyers will conduct financial and operational assessments to validate the company’s stated value. Sellers should be prepared for negotiations surrounding liability allocation, indemnification provisions, and potential price adjustments based on due diligence findings.

Tip: Sellers can mitigate risk by working with experienced legal advisors to define representation and warranty caps, ensuring they are not held liable for unforeseen business issues post-sale.

Post-Sale Agreements: Non-Compete & Consulting Roles

Most buyers require sellers to sign a non-compete agreement, preventing them from launching a competing business within a defined timeframe and geographic area. Additionally, some deals include consulting agreements, where the seller remains involved for a transitional period to assist with customer relationships and operational handovers.

Example: A recent industrial business acquisition saw the sellers signing a consulting agreement, a 3-year non-compete agreement, and a non-solicit agreement.

Escrow and Holdbacks

To protect against post-closing risks, a portion of the sale proceeds may be placed in escrow for a set period. These funds cover potential indemnification claims or undisclosed liabilities. Sellers should negotiate escrow terms carefully to ensure fair access to their proceeds while providing reasonable security for the buyer.

Industry Standard: In lower middle-market deals, escrow amounts typically range from 5-15% of the purchase price, held for 6-18 months post-closing.

Conclusion: Structuring for Success

There is no one-size-fits-all approach to structuring a business sale. Each transaction requires careful alignment of financial incentives, risk management, and long-term planning. Sellers must balance immediate liquidity with future risk exposure, ensuring they receive fair compensation while setting the business up for continued success.

At Optics Capital Advisors, we specialize in structuring deals that maximize value while protecting sellers from unnecessary risk. Contact us today to discuss how we can help you achieve a successful business transition.