Deal structuring is a way company A can acquire company B with low risk involved. This article discussed the importance of deal structuring and the pitfalls to avoid while trying to make a deal.
Moreso, this article explains how to avoid acquiring a company that will not survive or will later crumble.
What is deal structuring?
Deal structuring is a legal agreement between a buyer and seller in a business deal. The term deal structuring includes what the buyer and the seller must know about the contract terms.
In other words, this refers to the rights and duties of the two parties (buyer and seller).
The term deal structuring is beyond just buying and selling; it is a method by which a company can acquire another company with low risk.
Deal structuring comes into play anytime an establishment is about to go into business with another, and deal structuring establishes a legal ground upon which the two companies can tread.
Provisions found in a deal structuring vary from one contract to the other, based on what the seller wants to sell and the parties’ intention.
A deal structure also touches on the aspect where the buyer can take absolute control of the asset after all the necessary terms have been fulfilled.
What does a deal structuring consultant do?
Deal structuring consultants help in accomplishing a successful deal by doing the following:
- Creating an Acquisition Strategy
This is one of the foremost roles of deal structuring consultants. If this stage is skipped or done haphazardly, several things can go wrong in the future.
Therefore, most deal structuring consultants are always more careful during the acquisition strategy phase.
Buyers start by checking what they will gain from their acquisition. That is, whether or not the company they want to acquire is actually worth the value.
On this note, it is important to sit back and draw a scalable acquisition strategy that will work without any financial downsides later in the future.
- Building a Long List of Targets
To build a long list of targets, you need to have an acquisition strategy and motivation for your establishment.
What follows this is deal sourcing and origination.
- Refining Target Criteria and Evaluating Potential Target Companies
This is the sorting process where you arrange the target company in order of profit to gain at the end of the day.
The company with prospective low profit will be on the bottom while the target company with good or high profit will be on top.
- Making Initial Contact with Targets
The next step now is to turn to corporate development teams to work on the list by approaching companies directly.
You can approach the CEO about your deal or top official in the company.
- Evaluating target
When the buyer and the seller connect, the critical aspect is to listen so that the buyer can capture the potential sell-side as possible.
After the meeting, a thorough review of the current financial statement is necessary.
This is important so that you will not already acquire a company in debt.
- Negotiating Purchase Price/Offer
In the negotiation aspect, the buyer will send a well-structured letter of intent(LOI) to make the initial offer.
This is a non-binding document that is common to all deals. Then the seller will say if the initial offer is okay by them or not.
- Conducting due diligence
After the sell-side accepts the buy offer, a thorough scrutinisation of the target begins.
That includes examination of:
- legal matters
The deep dive into the target is known as due diligence.
What is the importance of deal structuring?
Deal structuring enables a business buyer to sha the following deal to their advantage, resulting in a massive transfer of value from the sellers to the buyer at closing.
The key to the right deal is buying at the right price with the proper structure.
If the deal structuring is implemented correctly, deal structuring allocates risk from the buyer to the seller through the following:
- Performance-based earn-outs instead of cash at closing.
- Long-term seller notes instead of cash at closing.
- Purchase price and indemnification escrows.
- Requiring working capital & money to be part of the deal.
- Requiring rollover seller equity in newco.
What are the pitfalls to avoid in deal structuring?
1. Chasing the deal without keeping an eye on the bottom line
If the asset and profit the buyer wants to acquire are not worth the deal, do not bother to continue with the agreement.
2. Ignoring regulatory issues
The buyer should learn about the regulatory structure and compliance environment in the industry and consider hiring an experienced attorney who is well familiar with deal structuring.
3. Failure to conduct due diligence
The due diligence involves tracking enough information about the target company so that the buying party can decide on a merger with open eyes. The process includes looking for risks in the target company’s contracts.
Failure to do so will almost certainly backfire to haunt the company.
4. Buying a company licensing technology instead of the rights to the technology
Often, a company buys another and later realises that the acquired company doesn’t own its technology.
If the buyer doesn’t conduct due diligence, the company may not realise until it is too late.
We now understand what deal structuring means and how to strike a deal that will not expose the buyer to too many risks. The article also covers the pitfalls to avoid while creating deal structuring.