Deal structures to optimise the deal value
In the last few editions, we have looked at two valuation methods which give a headline figure based on a multiple. However the value you obtain will be determined to a large extent by the type of deal structure you agree with a buyer.
Whilst being paid 100% of the deal value on completion would seem the most preferable deal structure, this rarely occurs in the sale of IT support and telecoms businesses, as with most service sector businesses, where the value of the company's tangible assets tends to be nominal and the value lies in the future client revenues.
Far from being a 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 post 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, and would rarely advise accepting less than 50%.
There are many ways to structure a deal but they broadly fall into three categories as below. They are not mutually exclusive and the type of structure you select will depend to an extent on your reasons for sale and personal objectives.
1. Deferred payment
This is where a portion of the deal value is paid post completion on an agreed payment schedule over typically 12 to 24 months. The amount is fixed and its value is not dependent on the performance of the business.
2. Earn-out arrangement
This is where a portion of the deal value is paid post completion on an agreed payment schedule over typically 12 to 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 of the cherry". If we look back to the tipping points for selling an ICT business explained edition 1 of our E-Tutorial, most buyers will look to grow your company to the next tipping point; when they sell your 20% may be worth as much again as the 80% you sell now.
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.