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3 Key Points to Structuring a Deal

Every business owner has a big dream for their company and wants to make it happen. The problem is many deals can fall apart over terms, leaving both parties confused and frustrated. There are many pieces to consider when structuring a deal. How much? What price? Cash vs. stock? Lump sum or payments over time? Often when considering deal points, it can be overwhelming. It shouldn’t be this hard to sell a business. 

Recently, I’ve worked with several clients that were trying to sell their business. In one instance, the price was just too cheap. The business was worth more than the buyer wanted to pay. Further, the buyer had very little equity to put into the transaction and asked the seller to accept a note. Neither of these deal points were acceptable to the seller who wanted all cash in a lump sum. 

In a second instance, I had a client who was approached by a strategic buyer who was aggregating businesses in his market and was using private equity to finance the purchases. They offered a purchase price that was low and much of that purchase was in the form of their company stock and the buyer wanted cash. The combination of those 2 points was enough for the seller to back away. 

The last situation was a company that had been run by two partners for 30 years and it was time for them to retire. They had groomed 4 key individuals into management positions and the opportunity to purchase the company was presented to these 4 employees. The offer was attractive and they were able to come up with a combination of equity, bank financing, and seller financing that worked for all parties. The deal will be closed and funded in the coming weeks. The key takeaways here are that timing was right for both parties, the terms were mutually agreeable, and the tax impact for the sellers was attractive based on the terms. 

I’ve found that timing, terms, and taxes (the 3 Ts) are the key points that drive the success in structuring and financing a deal. In this case, the timing was right for buyers and sellers. The sellers are Baby Boomers who were ready to retire and these key employees were able to step up into ownership and management. The combination of some cash and some seller financing spread out the tax impact; taxes are paid on the cash at closing the seller receives. But, the tax impact on the seller is realized over the term of the notes.  

Finally, the buyers could only come up with about 10% equity and the bank financed 50%. But, the seller was willing to carry a note for the remaining to help their employees finish the transaction. The terms of the seller note and the bank note were favorable to the buyers. So, the cash flow of the business will be able to repay both the bank and seller note over mutually agreeable terms

It’s important to pay careful attention to the 3 Ts and be sure you’re structuring the deal favorably for all parties involved, so that the deal has the best chance of going through. 

If you’re struggling to make progress on the purchase or sale of a business, remember it takes a village. A CPA and attorney can help you with the legal and tax implications of the transaction and a business advisor/investment banker that can advise of the business portion. If you’re approaching the sunset of your career, don’t delay this planning and miss an opportunity to maximize the value of your business as a seller. Start today!

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