09 Jul Reducing Uncertainty By Utilizing Stock Deals
When an entrepreneur is engaging in the M&A process many times the owner will receive an offer that involves a combination of cash and stock. For example, many times the offer is 60 – 80% cash with 20 – 40% stock. However, some deals are structured more like a merger where the buyer does not want to offer cash at all but simple allow the seller to retain equity after the closing of the deal. While the seller could pass on the deal, there are also ways to structure the M&A deal to ensure the seller receives the cash he or she needs when the stock is sold over the following months and years.
- Establish a floor and ceiling: When structuring the deal the seller can avoid uncertainty of the future by including language in the agreement that establishes a floor as a minimum price that the company will sell for. Then as the buyer acquires the stock over the following months the seller is assured that he or she will be paid a given amount. In such circumstances the buyer may demand a ceiling as well to protect against the risk of paying far more than what was originally anticipated.
- Establishing a fixed stock price: Very similar to the floor and ceiling, the agreement may demand that the stock is paid out over time at a given price regardless of how well the companies are performing two years after the deals is closed.
- Hedging after the sale: If the seller can negotiate an addition to the agreement that allows that individual to hedge against losses in the downside then he or she may be able to avoid lockup. If the seller is able to go to a third party to buy and sell puts and calls then the risk is mitigated across many parties. This is actually something that Mark Cuban did after the sell of his company to Yahoo.
- Decreasing the lockup time frame: If the seller is able to negotiate a shorter time before the stocks can be and are sold then the time he or she is locked up is decreased.
We have all heard the phrase, “risk, risk, risk, equals reward, reward, reward.” The more risk the seller is willing to acquire and endure the greater chance of upward potential. If the seller is confident the deals will be a good fit and that the companies will continue with a northward value trend, then it might be a good idea to retain the equity with the upside potential.