Deal Structure

In any business acquisition, a deal structure must be formed to specify the financial terms, conditions, and process for successfully completing the transaction. The deal structure outlines a set of terms that will help guide a smooth transfer of business ownership, and will usually reference whether the transaction is leveraged, unleveraged, a joint venture, or will include convertible/participating debt, or a traditional debt transaction.

Deal Structure Objectives

The key objectives for a successful deal structure include coming to a fair agreement on price (including meeting the seller’s price expectations) and ensuring that the buyers will be capable of operating the business in line with their current financial goals.

No two deal structures will be exactly the same, or include the same terms, and the buyer and seller should come to an agreement based on the unique elements of that particular business transaction. The buyer and seller, the industry, the economy, the financial market, and, of course, the business itself all will play a role in defining the deal structure.

Deal Structure Terms

There are a number of terms that will need to be agreed upon in order for any deal structure to be effective. Paramount to the success of a deal structure is the business purchase price agreement, but a number of other factors are also critical to the deal structure. These terms may include, but are not limited to, the following:

• The amount of the buyer’s down payment
• Whether the transaction is to be structured as an asset or stock sale
• The seller’s financing terms
• Any holdback of the purchase price as defined in an earnout agreement
• Consulting and/or non-compete agreements with the seller and any of the business’ key employees
• Terms related to any seller-owned real property used by the business

Financial Requirements

There are also a number of financial requirements that will affect the success of the deal structure, including factors that are both debt and equity/capital related. Some of these factors include:

• Expected compensation for the new ownership
• Debt service coverage ratio that is expected by the lenders
• Payback period on the buyer’s down payment
• Short term capital needs, post-closing
• Capital Availability post-closing to the business and its new owners

If you are preparing to buy or sell a small to medium-sized business, you may want to investigate the methods for valuing the business or use our business valuation tool.