One of the fastest ways to close an acquisition is putting together the right deal structure.
Both you and the buyer need to find common ground, a structure that reflects your positions on the negotiating table and reduces risk on each side.
Once you know how to structure a deal with a positive outcome for both of you, the better your chances of closing an acquisition. You might even propose terms in advance to increase interest, sweetening deals with seller financing, milestones, or consulting for equity.
I won’t list every conceivable deal structure here, but instead explain some of the more common structures found in the micro-to-medium SaaS space.
#1 The Clean Break: All Cash, Upfront
Whether it’s stock or assets, an all-cash acquisition paid upfront is probably the simplest for both of you. It’s a clean break: you leave with cash and the buyer leaves with your business. Both of you are then free to pursue your post-acquisition plans without restraint.
For you, that might mean using the acquisition funds to seed a new business, take a much-needed vacation, or even retire to spend time with the family. It’s therefore ideal if you’re shifting your focus to another business or taking a break from the rat race.
It works for the buyer, too, since there are no conditions or warranties to monitor. They can deploy changes instantly to start earning a return on their investment. No repayment schedules eating into their growth plans, and no need for permission from minority shareholders.
#2 The Gap-Closer: Down Payment + Financing
Let’s imagine you’ve found the perfect buyer. They agree to your valuation and are ready to sign the purchase agreement. There’s only one problem – they can’t stump up all of the money. Maybe it’s a cashflow issue, a bank loan fell through, or perhaps they want to retain funds to invest in your startup post-acquisition. Whatever the reason, you need to close the gap.
One way of doing this is accepting a down payment of, say, 25%-75% of the purchase price and allowing the buyer to pay the remainder in installments in what’s called seller financing. While not as convenient for you, especially if you’ve earmarked the money for other things, it could mean the difference between closing an acquisition or putting your startup back on the market.
Not only does seller financing help close gaps, but it can also get you more for your startup. If the buyer wants to pay 50% or more of the purchase price in installments, or wants to spread payments over a longer period, you bear a greater risk of them defaulting. The buyer should share some of that risk in the form of a higher purchase price.
This is generally the most common deal structure on Acquire as it can put a buyer at ease knowing you’ll be around for a period of time to help with the transition of assets. It also helps substantially widen your potential buyer pool. Stating upfront that you’re open to offers with seller financing can sometimes even increase the total purchase price because you’ve helped reduce the risk of acquiring your startup.
#3 The Deal-Saver: Down Payment + Financing + Earnout
Some buyers have the cash to Acquire your startup but aren’t comfortable with putting it all on the table. They might have reservations about your operations, be uncomfortable with your valuation or nervous about market changes or competitor advances. To save the deal, you might need to offer financing with an earnout to both close the gap and reassure your buyer.
Similar to #2, how you decide the down payment and financing percentages is up to you. Just ensure you’re confident in the buyer’s capacity to make payments and the down payment is enough to satisfy you in the interim. Once that’s settled, it’s time to negotiate a payment schedule and the milestones you must hit to qualify for them, otherwise called an earnout.
An earnout ties you into the business when you might have zero control over how it’s run. Still, your company must hit the earnout targets to get paid the remaining installments of the purchase price. As a result, it’s critical to negotiate both achievable targets and as short an earnout period as possible (6-12 months is usually okay).
The longer the earnout, the more exposed the business is to extrinsic effects that could hinder your ability to meet those earnout targets (milestones). Nevertheless, an earnout is an attractive deal accelerant. It demonstrates your faith in the business and underwrites some of the buyer’s risk, which can attract more offers for your startup.
#4 The Retainer: Down Payment + Equity (+ Financing)
You might think equity a no-no if you want a clean break. But what if it meant averaging more money in the long term? If your buyer has a proven track record of 10xing Acquired companies, wouldn’t you like a share of that success? You might’ve sold the business but you also worked hard to get it off the ground – and it’d be nice to share some its future glory.
Buyers, on the other hand, might relish the opportunity to have you stay on in some capacity, even if it’s just to consult on the business now and again. As such, it might make sense for you to retain some equity in the business and accept a lower purchase price. You might enjoy consulting for a business you founded, and it helps close gaps, too.
However, an arrangement like this only works when you and the buyer like each other. If your goals for the business post-acquisition misalign, things could get fiery. And retaining equity in a business you no longer run – even if you know it inside-out – is like investing in a brand new business. There are risks so do your due diligence on the buyer before closing.
#5 The Buyer Magnet: 100% Financing (+ Earnout)
Let’s say your business has been on the market for a while. Perhaps it’s a niche industry, a complex product, or the benefits aren’t immediately clear – maybe there’s a ton of potential but you’re a little too early to market. In these cases, offering 100% financing could tip buyers into acquiring your startup despite its shortcomings.
Is it ideal? No, but for microSaaS or niche tech products and services, it could entice buyers to Acquire your business when the return on investment is difficult to project. Maybe you’re pre-revenue and the buyer wants to tie the purchase price to milestones through an earnout, or maybe they’re simply after your tech stack to improve the efficiency of their own business.
There are a million reasons why 100% seller financing is worth considering, but the main one is when it has proven difficult to attract buyers without it. If that pill is still too tough to swallow, you might be better off holding on to the business until it commands better terms or simply moving on and applying your experience to a new business.
#6 The Trade-Off: Equity Swaps
Cash is king in any acquisition since it’s the most liquid. However, not all buyers are cash-rich – at least not at acquisition scale – and they might put something else on the table. This might be equity in another business they own, or if you’re considering a merger, equity in the new, combined entity. This is more common in the acquisition of public companies or large startups, nevertheless, you might get offered some buyer equity to reduce the cash price of smaller startups, too.
Unlike retaining equity in your own business, an equity swap is a different beast altogether. You’ll likely have little to no knowledge of this other company so expect to do a lot of due diligence. And even if it seems like a good investment, you’re probably better off with a mixed deal as you’ll need some capital for whatever you plan to do next. Consider your financial needs first, regardless of how attractive equity might seem.
Mix ‘n’ Match for the Best Results
Every startup is unique and what works for one won’t necessarily work for another. Equally, the structures above aren’t recipes for success, per se, but frameworks for discussion. I can’t overstate how important it is to customize the deal to your and the buyer’s needs. Don’t take anything, or anyone’s advice (including mine), for granted. Your mileage will most definitely vary!
An acquisition offer is a fantastic achievement and what happens next might seem daunting, overwhelming even, but like all big events in life, remember to take it one step at a time. You’ll find a wealth of information on Acquire and we’re always on email or the end of the phone to help out. We’ve been through it before and it’s our mission to make it easy for you. Best of luck!
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