Since the downturn, bridging the gap between buyer and seller price expectations has been a constant challenge and for some time the gap was just too big for many to give serious consideration to a transaction. However, in recent years we have seen more deal activity where buyers and sellers are willing to be more open to finding innovative solutions in bridging the gap.
For business owners, the starting point should be to validate their price expectation and there are some key points that should be considered, including:
- Current trading – how does this compare to historical and forecast trading? What support and visibility is there that trading will continue at current levels increase?
- Technology / Intellectual Property – does the business have any technology or IP with tangible value to justify a higher price?
- Surplus assets – does the business have excess cash or non-trading assets on the Balance Sheet that will increase the value?
- Liabilities – does the business have any borrowings or contingent liabilities that would reduce the value?
- Comparable transactions – have there been any recent comparable transactions to validate the price expectation?
Once a realistic valuation has been established between the parties, any seller will need to consider what purchase price structure is acceptable. Most will have a strong preference for cash at completion but to maximise the value and ultimately achieve their price expectation the seller may also require to consider a structured deal which could include one or more of the following:
- Deferred consideration – cash paid at a future date but not linked to performance
- Earn-out – cash paid based on the business achieving pre agreed targets
- Equity rollover – the seller retaining a shareholding in the business or taking shares in the acquiring business
Of course these options carry an element of risk but with the right advice the risks can be minimised and deliver a successful outcome for the seller.
For buyers the objective will always be to buy the right business at the best price and manage any potential risks identified during due diligence. Reducing the cash at completion is often seen as a way of reducing the risk so structured deals are becoming common place.
We have witnessed a noticeable shift in approach where buyers and sellers are more prepared to be flexible to facilitate transactions and based on current deal flow, expect this to continue to increase.
By Brian McMurray, Partner, Corporate Finance, Anderson Anderson & Brown LLP
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