Sell-Side M&A: Bridging the Business Value Gap

The business buyer-seller value gap is a very natural phenomenon. Bridging said gap can be difficult, even for the most seasoned entrepreneur or transaction advisor. Having outside assistance is obviously necessary and that’s the pitch of even the least pushy investment banker, but there are other tactics and tools that—if implemented— work to help move the business valuation needle.

Deal Structure

The phrase “creative financial engineering” is often used to describe tactics that benefit a business owner or seller in a transaction. I’m not talking about fishy overseas havens in the Caymans or even the more legit ESOP, trust or tax-haven structures. I’m speaking about structures built into the deal itself that can aid in bridging valuation expectations between buyer and seller. Here are just a few ideas:

  • Allow the buyer to acquire a majority (or even a minority if the buyer is willing) ownership of the company’s stock. In other words, don’t make the deal a 100% divestment. Buyers can even structure call provisions on the remaining say 10% to 40% of the deal on an annual basis for several years. Buyers can use an EBITDA multiple that will bring the seller back to the table, but keeps the buyer’s limited cash protected from immediately overpaying.
  • In some cases, a second generation seller might be willing to take back a preferred stock equivalent of some small portion of the transaction (say 10%).
  • If agreeable, buyer and seller can create a joint venture subsidiary with 50/50 ownership and place the assets or business line into that entity, allowing both buyer and seller to take advantage of the accretive growth over time. Seller takes on some of the risk, but also reaps the expected reward of the upside If the opportunity takes off, as both might expect or as the business plan outlines, everyone wins.
  • Give buyer senior capital (to be paid out first) and seller with some junior capital.
  • Buyers can effectively reduce goodwill in the deal by paying excessive overhead expenses to the seller such as above-market rent on an owned building. This creates a tax situation that can benefit both buyer and seller, particularly if the agreement is long term.
  • Buyers can structure royalty payment to the seller based on gross sales, rather than some type of manipulate-able earnout based on gross margins or EBITDA.

Seller-Specific Tactics

While the best value enhancement is performed long before the sale, direct engagement with advisors in the middle of the deal can greatly assist in mitigation of tax and other foreseen issues that will eat-away at the seller’s post-deal capital. Here are some pointers:

  • One of the most delicate post-deal matter when it comes to “take-home” pay is tax. Having the right tax advisors and company valuation professionals on the team will be paramount to maximizing the liquidity event.
  • In some cases, the buyer may only have interest in a single product line or business unit. Carving out an asset sale for this specific BU can leave the balance sold available to be sold to another party. Some buyers are savvy enough to know the sum of the parts is greater than the whole and will buy companies, only to parse out and sell those assets or divisions that don’t tightly match their core business. The M&A advisor can and should formulate a plan that leaves this benefit squarely in the hands of the existing owners and founders.
  • If blessed by a tax advisor, a third party “straw” transaction may provide tax savings. In this scenario, a third party buys the stock of the selling company at a below-market price. The buyer than makes an asset purchase from the third partly at a price above the stock price. While this scenario can provide a tax benefit to both buyer and seller, I’m not advising it as there are potential legal ramifications on both structure and the law of the state in which the company domiciled.
  • Non-cash or non-deal incentives can frequently be more powerful than some buyers recognize. Don’t leave other items off the table, including ongoing owner involvement, employee retention or even things as seemingly unimportant as maintenance of the company name.
  • Sellers will often bid high when seller runs a broad auction for the business, but then later knock-down the seller price during due diligence. Performing some preliminary mock-due diligence is one of the often overlooked tasks of the advisor to ensure the skeletons don’t later come out to haunt a nearly-closed deal.
  • Perform diligent deal breakdown analysis based on various potential scenarios of each deal. For instance, weigh stock vs. assets scenarios, earnout options and on-going employment agreements. Track the transaction directly with the buyers in regard to comparables, fair market value scenarios and company benchmarks.
  • It goes without saying, the sellers always need to engage earlier rather than later with estate and tax planners to ensure maximized after-tax benefit.

Overseas Transaction Nuances

Certain benefits exist for certain overseas and cross-boarder transactions. For instance:

  • A U.S. acquirer looking to finance and acquire a company in Australia may pay a consulting agreement from the U.S. parent to an individual in the Australian company instead of having the Australian subsidiary paying the fees. In many cases, this can be treated as a “tax free” payment because it is not reported in the country where the subsidiary resides—in this case Australia.
  • In some countries where pride of company ownership is a lofty aspiration, a buyer may increase his/her personal goodwill by leaving a larger percentage of the equity with the seller, giving the community the appearance that the seller still maintains ownership of the firm.
  • Structure across countries creates complexity, but also opportunity. For instance, if a European company seller has a holding company in Switzerland for some of the intangible assets of the business, the buyer can pay separate payments for these assets or asset leases. This can help the seller in avoiding capital gains taxes for a portion of the company’s assets.

The value gap is a palpable, tangible thing, particularly on the sell-side where the exit can mean the assets required for retirement for the owner. Some of these items should prove helpful in moving the dial in the right direction.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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