Maximising Deal Value: Effective Strategies for Structuring Business Deals
Updated in March 2024
Most business owners have a figure in their mind about how much their business is worth when the time comes to sell their company.
Did you know that the value that you achieve will largely be determined by the type of deal you agree with the buyer? You may have a figure in mind but it’s all down to the deal. Understanding how to structure a deal will optimise its value.
Deal structuring and pricing can be one of the most complex processes any business has to face. But get it wrong and your business may not achieve its optimum value.
How deals can fail
When it comes to mergers and acquisitions, it is not only small and medium-sized businesses that face challenges. Even the largest companies can fail to agree a deal when it comes to valuation.
In 2016, Mondelez International, the owner of Birmingham-based confectionary giant Cadbury, intended to buy competitor chocolate firm Hershey. But Hershey rejected the $23 billion offer because a deal structure could not be reached. After two months, Mondelez failed to convince Hershey, who had been trying to sell, that the value and deal was right for them. In the end, the deal fell through and to this Hershey was never sold.
So how do you structure a deal that optimises the value of your business?
Obtain and optimise value
There are a number of ways to determine the market value of your business. These include:
- Using earnings multiples
- A discounted cash-flow analysis
- Multiples of revenue
- Tally the value of assets
An industry that often sees acquisitions is within IT support and telecoms businesses. It is an area we are experienced in and, like most service sectors, things can be a little different. In such industries, prospective buyers commonly use two valuation methods:
To a large extent, the value you obtain will be determined by the type of deal structure you agree with a buyer. Being paid the whole sum on completion of the deal is, unfortunately, quite rare when it comes to selling IT support and telecoms businesses, or indeed most professional service sector businesses.
This is due to the fact that the company’s tangible assets tend to be nominal and the value lies in future client revenues.
Far from being negative, ‘staged payment deals’ can provide a win-win opportunity to optimise the deal value through sharing with the buyer the benefits of your company's continued growth after its acquisition. It also demonstrates to a buyer that you have confidence in the business going forward.
At the same time, you will need to have confidence in the buyer's capability and incentive to make a success of your business. Whatever the structure, the balance between payment on completion and the post completion amount will depend on your appetite for risk versus reward.
In general, and depending on the notice period on your client service contracts, we would recommend aiming for 70-80% of the deal value to be paid on completion. We would rarely advise accepting less than 50%.
Structuring the deals
There are many ways to structure a deal. There are many ways to structure a deal but they broadly fall into three categories. They are not mutually exclusive and the type of structure you select can be mixed in order to optimse the deal.
1.Deferred payment
This is where a portion of the deal value is paid post-completion on an agreed payment schedule over typically 12-24 months. The amount is fixed and its value is not dependent on the performance of the business.
2. Earn-out arrangement
Such arrangements are where a portion of the deal value is paid post-completion on an agreed payment schedule over, typically, 12-24 months. The amount is dependent on the performance of the business and is typically linked to turnover or gross profit over the earn-out period, or in some cases the renewal of client service contracts.
3. Retaining a shareholding
This is where the seller retains a minority shareholding in the company, typically around 20%. A shareholders’ agreement is put in place to allow for the eventual sale of these shares to the buyer based on an agreed valuation model. In this case, the seller typically remains a senior manager/director within the business.
The main advantage in retaining a shareholding in your company is the chance to take two bites from the cherry. Most buyers will look to grow your company to the next level; when they sell your 20% may be worth as much again as the 80% you sell now.
If you are planning on selling your business you need to be aware that until contracts are signed and money hits your account, everything is still to play for.
As experts in the sale of IT support and telecoms businesses, we understand the unique issues when it comes to striking a deal that optimises the value of your business.
Risks and benefits associated with each deal structure
Each deal structure mentioned—deferred payment, earn-out arrangement, and retaining a shareholding—comes with its own set of risks and benefits.
Deferred payments can provide the seller with a safety net through guaranteed payments over time but might involve risk if the buyer's financial stability is uncertain.
Earn-out arrangements align the interests of the buyer and seller by tying payments to future performance metrics, offering potential for higher returns but introducing uncertainty for the seller.
Retaining a shareholding allows the seller to benefit from future growth but also entails continued risk exposure to the business's performance.
Influence of market conditions and industry sector on deal structure choice
The choice of deal structure to maximise deal value can be significantly influenced by market conditions and the industry sector of the business. In robust markets or high-growth sectors, sellers might favour structures like earn-outs to capitalise on future growth.
Conversely, in more volatile markets or sectors facing uncertainty, sellers and buyers might prefer deferred payments or retaining a shareholding to mitigate risks. The specific dynamics and trends within the industry play a crucial role in determining the most advantageous deal structure.
Would you like advice on the best deal structure for you in the sale of your IT support and telecoms business?
We would be delighted to offer you a free appraisal and indicative valuation of your business to give you guidance on its value and attractiveness to buyers, the most likely deal structure and whether now is the right time for you to sell. Our appraisal can take the form of either a face-to-face meeting or a telephone call, as you prefer.
Please contact us on 020 8090 9380, email [email protected], or complete the form below to arrange an appropriate time to review your exit strategy and the value of your business in confidence and without obligation.
This article originally appeared as part of our series of e-Tutorials for the Sale of IT Support & Telecoms Companies.
