It’s More Than Price – Negotiating the Deal Structure
Which offer would you accept?
Offer 1: $13 million purchase price with $3 million cash at closing and a $10 million earnout.
Offer 2: $10 million purchase price with $8 million cash at closing; a $1.5 million seller note; and a $500,000 escrow.
Trick question! You can’t decide. You don’t have enough information to make a decision.
Don’t negotiate any terms in isolation.
Before I could evaluate either offer, I would need answers to the following questions:
- For Offer 1:
- What are the terms of the earnout? Is it based on revenue? EBITDA? How many years?
- Who will have control of the business post-closing?
- What is the allocation of the purchase price?
- What is the extent of the representations and warranties (reps and warranties), indemnification, and escrow?
- For Offer 2:
- What are the terms of the seller note, such as the number of months, and the interest rate?
- What is the extent of the reps and warranties, indemnification, and escrow?
- What is the allocation of the purchase price?
- About the Buyer:
- What is the creditworthiness of the buyer? This is relevant for earnouts and a seller note. You don’t want to accept an earnout or note from a buyer who is not creditworthy.
- What is the related experience of the buyer?
- Is the buyer requesting exclusivity?
- Does the buyer have the cash, or is the LOI contingent on the buyer obtaining third-party financing?
- How many acquisitions has the buyer successfully completed in the past?
- Timing:
- How long does the buyer need for due diligence?
- How long after the completion of due diligence can the buyer close?
- Escrow:
- What are the terms of the escrow?
- How long is the escrow period?
- What are the limitations of indemnification, such as caps and baskets?
- Transaction Details:
- Is the transaction structured as an asset sale or a stock sale?
- What are the conditions for closing?
- What is the survival period of the reps and warranties?
- Is the buyer requesting that the seller remain with the business? If so, what are the terms of the employment agreement?
Unfortunately, I am approached all the time by sellers who have an offer in hand with terms similar to one of the offers above. It’s common for sellers to focus only on the price. Yes, the language in the LOI might look impressive – but 90% of it may be boilerplate, and the terms may be vague enough that the buyer can rewrite them later.
Don’t negotiate any terms in isolation. That’s because the price is one of many pieces that constitute the overall transaction structure. The trade-offs and tensions can be summarized as follows: