Structuring your deal for success

Structuring your deal for success. How you structure a deal is just as important as the price you pay. Should you go all cash, seller financing or an earn out? The right structure can help you reduce risk, improve cash flow and get your deal across the finish line. Let's break it down. The first is going to be cash up front. This is simple but expensive. And how it works is pretty straightforward. You're going to pay the full purchase price at closing. The pros of this are no ongoing payments or financial obligations. The seller is also much more likely to accept a lower price for for a quick close. The cons here are going to be significant upfront capital from you as a buyer. Also higher risk if the business does not perform post sale. This is going to be best for buyers with available funds who want a clean break post acquisition. The second is going to be seller financing, which is essentially pay over time. How this works is the seller agrees to receive a portion of the payment over time, usually with interest payments as well. For example, maybe you negotiate 50% cash on close and then 50% seller financing. That would mean the 50% seller finance would be paid over typically 12, 24, 36, 48 months and with interest payments as well. So you're stretching out the remaining 50% of the final purchase price. And the downsides of this is not all sellers are going to agree to it. It can complicate negotiations with added terms. But the pros of this are obviously lower upfront capital to close acquisition. This aligns similar seller interest in the business's success as well. Because if they're receiving payments over 36 months, they have an interest, a vested interest, to see the business succeed so they can receive their seller financing payments. It's also easier to get approved than traditional bank loans. You don't need one involved at all, obviously. Also pro tip here@acquire.com, we can actually help locate businesses that are open to seller financing. So if this is a route that you want to explore with business owners, we can help narrow the field so you can contact acquisition opportunities that would be open to this financing option. The third is going to be earnouts. This is where you essentially tie future performance to payments. How it works is a portion of the sale is contingent on the business meeting specific revenue goals that you and the seller agree upon. The pros of this is it's great for when a seller wants a higher valuation than the buyer is comfortable with. And so you can both agree that an earn out here is appropriate. And if the business continues to perform, then the seller is going to be paid for this performance. It also reduces upfront financial risk. And the cons here is it requires trust between the buyer and seller. From a seller perspective, they want to know that that the business is going to perform and they have some sort of control to make sure that happens. And then the buyer also wants to know that the business is going to perform. So everyone's kind of on the same page, but you still need to have trust there. And it can also lead to disputes over performance metrics. For example, if it's a revenue target, are we going to keep expenses the same? Are we going to reduce expenses? Then how are we going to hit the revenue target? So it can get kind of complicated. So being really clear and upfront when you have an earn out agreement is absolutely key to make sure that it's realistic and it will be hit. This is best for businesses with high growth potential but uncertain short term performance. And again, the right deal structure is so critical to a successful acquisition. So if you're just not sure, you don't know what seller financing is, you don't know how to structure an earn out, you don't know what a hold back clause is, and you just like some help. Well, at acquire.com, we'd be happy to help you as a buyer structure the best deal and the best offer to really ensure that you get the most out of your acquisition, you minimize your risk and the business that you buy is a complete success post acquisition.