How to structure a deal

How to Structure A Deal and Handle Acquisition Negotiation

Now that Due Diligence has been completed and you are ready to move forward with a deal, we will begin the fifth step in this series.

If you need a refresher on all seven steps, you can review them below: 

  1. Define your acquisition strategy 
  2. Identify target companies
  3. Build a business case and develop financial modeling 
  4. Due Diligence
  5. Deal Structure negotiation
  6. Sign and close
  7. Post-close integration

One of the essential stages in the expansion through acquisition process is deal structure and negotiation. In this stage, you’ll want to first define your general deal structure before you begin serious discussions with sellers. Since the purchase structure can have legal and tax implications for the buyer and seller, it’s important you have a clear understanding of what you can negotiate and what is imperative to a successful deal. 

We recommend seeking legal and tax counsel when preparing a non-binding offer. The legal document containing your non-binding offer will address key points that need to be agreed upon before due diligence can begin. If you want to create a deal structure that fits your business acquisition goals, find out more about the most common purchase structures, the main components of any deal structure, and what to do after you send your offer.  

The Two Most Common Purchase Structures

As you put together an offer to acquire another company, you should be aware of the two most common purchase structures to see if either align with your goals. Learn more about the two main deal structures for operating and professional businesses below:

1. Stock Purchase 

Just as the name implies, a stock purchase involves a buyer purchasing the stock of the existing shareholders either in part or in full. A significant downside to the buyer is that they are buying all the risks associated with prior client contracts, suppliers, subconsultants, employees, terminated employees, and the list goes on. The buyer may not deduct the cost of the stock for tax purposes in most cases.

2. Asset Purchase 

An asset purchase is very common with operating and professional services businesses. The buyer buys the assets of the business and hires the employees. The buyer does not assume non-operating liabilities typically, and can deduct the cost of the purchase over time for tax purposes.

The Main Components of An Acquisition Deal Structure

Regardless of whether you choose to go with a stock purchase, asset purchase, or another type of deal structure, there are a few main components of any purchase structure you’ll want to include in your offer. These key components include:

  • Date of offer
  • Purchase price and expected payout timeframe
    • Cash
    • Stock
    • Cash/Stock
    • Earn-out
    • Commission
  • Roles and compensation for key-stakeholders
    • Restrictive covenant requirements
    • Employment agreements required
  • Definition of what is being conveyed by the seller for the value the buyer is paying
  • Tail insurance requirement
  • Date offer expires
  • Expected closing date

There are many other details you can include, and we encourage you to add anything that would be a dealbreaker for you if the seller does not agree. For most other details, stay broadly focused to allow due diligence to provide the data needed for final decisions. It is much harder to walk things back once time, energy, and money have gone into this process. 

What to Do After You Send Your Offer

Once the seller receives the offer, follow up to schedule a check-in call to answer any questions and receive feedback. It is common for the seller to negotiate a non-binding offer. Before answering the seller, it is important to prepare your internal team and discuss what is negotiable and what is not. Do not immediately react to the feedback. Ask questions to gain an understanding of the terms, and then meet with your team to discuss. 

Many times, what might have been a “no” could turn into a yes by thinking through the response. Consider what you can do and focus on how to communicate that message clearly. If the seller has asked for something unreasonable or not within your ability to see a clear return on investment and there is no way forward, “no” is the best answer. 

Once the non-binding agreement is executed, due diligence begins! 

Choose Thinc Strategy for Deal Structure and Negotiation Assistance

Need help choosing a deal structure and crafting an offer that reflects your expansion through acquisition goals? Thinc Strategy can help. 

As a leading provider of merger and acquisition advisory services, we’re prepared to walk you through every step of the acquisition process and ensure you’re fully informed throughout. With one of our certified merger and acquisition advisors in your corner, you’ll know any acquisition you make has been well-vetted, meets your goals, and is well-positioned to show a solid return on investment.

To receive a merger and acquisition advisory service consultation, please contact us today.