Don't Let A Poor Deal Structure Undermine Your Business Exit Financial Goals

A surprisingly large number of business owners have not honestly thought about their "exit number" - the amount of money that signifies your ultimate financial target when selling your business.

Selling your business is an emotional journey.?Therefore, your "why" of selling and your "when" are crucial mental hygiene factors to resolve - not just for your sake.?In addition, everyone involved with the sale, including your employees, family, and advisors guiding you along the exit path, deserve clarity and decisiveness during this period.??

If you genuinely know your "why" and "when", congratulations.?You have resolved the first two foundation steps of your exit journey.?The next step to determine is how much you need from the sale to be financially independent - whatever "independent" means for you and your family.

Based on your current expectations of what your business is worth today, what value do you need from the sale (after considering all non-business assets)??Do you have a gap, or will you be comfortable?

While is it surprising that many owners have not resolved their exit number, it is unsurprising few have thought about the relative importance of the deal structure.

However, the deal structure is more important when selling your business than the EBITDA multiples or total price.?The proper deal structure can help you derisk your exit number, while the wrong deal structure can lead to regrets down the road.

Determining your ideal exit number when selling your business

Let's briefly discuss the team that will help you successfully sell your business. The roles you require are to assist:

1. At the late stage - when buyers are being attracted and deals are being discussed;
2. Along the exit path - when you are boosting the strategic value of the business; and,
3. In the "purpose" stage, when you are resolving your why, when and financial goals.

One firm with deep experience in these three roles could fulfil your needs.??

Alternatively, an independent wealth advisor at the beginning, an M&A advisor at the late stage, and an expert at keeping you on the path towards a strategic sale - which is what I do - is a powerful combination.

To determine your exit number, you are best to employ a specialist private wealth planner, whether from a full-service exit firm or an independent. A specialist financial planner will help you put aside any emotions that may cloud your judgement.

Your planner will work with you to identify and estimate the cost of your short-term and long-term financial goals and your desired lifestyle once you exit your business. They will also review any pre-existing assets that you have, both inside and outside of your business, and any liabilities you may have.

After all of this information is gathered, your planner will help you build a financially sound exit strategy with realistic expectations and tangible milestones - one that is customised to your situation, goals and constraints.

With a comprehensive plan, you can formulate and answer the question, "What should my exit number be?"

This number should reflect the lifestyle you want to maintain and may be based on estimates of your company's worth, your business's recent performance, and any potential for future growth or decline.?

The answer to this question should be as precise as possible. It should reflect the financial resources that you need to attain your desired lifestyle, including any retirement savings that you wish to set aside or philanthropic goals that you may have.

Your comprehensive financial plan should also assess your exit number in the context of the current economy, forecasted market conditions, and the long-term sustainability of the businesses you are considering selling.?

This context will help ensure that you have ways to adjust your exit number should an unexpected market event arise or if your business performance is different from what you expected.

Establishing a clear target in mind early on gives you parameters for understanding the impact of potential offers - which can remain in flux until you settle a final transaction.

Knowing your exit number gives you the power to negotiate the best possible deal for yourself effectively.

Deal structure can make or break your financial outcome

The terms of a deal are significantly more important than the headline sum you are offered by an acquirer. This may seem obvious, however many business owners don't take the time to understand the terms of the deal structure they accept.

In fact, some studies claim that the majority of SME business owners regret the deal structure they accepted when selling their business. This is possibly a consequence of unwillingness to invest in the necessary advisors.?

Not fully understanding the deal structure will be costly, and typically SME business owners report:

1. They failed to fully understand the tax implications, such as not considering the best structure for their particular situation or not taking advantage of any tax credits or deductions that were available.
2. They accepted a deal that paid them a lower price, did not include any provision for future earnings, or did not provide for any ongoing relationship with the buyer.
3. They accepted an earn-out arrangement that ultimately left them at the acquirer's mercy, which jeopardised their financial goals.

Overall, the deal structure of a business sale is more important than the EBITDA multiples because it outlines the long-term implications of the transaction.?

Business owners who later regret their deal structures have often overlooked the long-term consequences of their decisions or failed to properly consider the buyer's return on investment, the tax implications of the deal, and the potential consequences of specific deal structures.?

The latter can be especially damaging, as the seller may be liable for certain liabilities or losses in the future.

It is, therefore, essential for you to understand the importance of the deal structure when negotiating the sale of your business.??

M&A firms specialise in negotiating deal terms that optimise your goals and a strategic buyer's goals. Your external accountant does not. So at the late stage of your exit, you need expert, specialist advice about the deal structure, and to facilitate this advice, you need to be very clear on your personal financial goals.

Takeaway - your financial goals are underwritten by you getting the right deal structure

When selling your business, a well-structured deal is the most critical determinant of your financial freedom.?

When evaluating any deal, you must determine if the total realisable value is enough to reach your desired exit number. This exit number may relate to supporting a specific lifestyle or reinvesting into another business venture.

If the structure is too favourable to the buyer, you could leave money on the table and end up with less than what your business is worth and less to reinvest, for example. On the other hand, if the structure is too favourable to you, you could risk scaring away the buyer or, worse, ending up in a legal battle.

The best deal structure will help you maximise the value of the sale while also protecting your interests, e.g. the right to compete or to start a related business. It will also deliver you better payment terms, such as deferring payments or receiving certain assets as part of the sale.

Furthermore, the proper deal structure will help to minimise taxes, ensuring that you keep as much of the sale proceeds as possible.

Read past editions of the newsletter?here . Three key outcomes to ensure that your business is bought not sold here . The number one reason M&A firms are ghosting you - crucial conversations - here . And how to attract a strategic buyer by reverse engineering capabilities here .

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This Week's Reading

Two articles from my reading list to help you grow and exit successfully.

Article 1: How To Sell Your Business Using A Thoughtfully Planned Exit Strategy

Dana Jacoby, founder of Vector Medical Group, suggests that to successfully sell your business you need to master five aspects:

1. Know your numbers or hire someone that does.
2. Get good at telling your story.
3. There is strength in asking for help.
4. Negotiate until you are uncomfortable.
5. Know who is in your corner.

Concerning point number 5 above, Jacoby says: Some experts can help you through this process and are worthwhile engaging. Having an experienced professional in your corner will ease the stress and help you feel more confident with the process.

The bottom line is that your business is a financial asset that holds value. Your business generates income for you now and can also create income for you when you sell it. Therefore, getting the most significant financial benefit from your business is a purposeful goal.

Source: forbes.com

Article 2: An M&A Guidebook for a Post-Pandemic World - Earn-out Trends

In this article, Seyfarth Shaw LLP provides insights on trends in M&A in the post-Covid environment. For example, pre-Covid deal reports show that in non-life science transactions with earn-outs, the earn-out potential as a percentage of the closing payment generally hovered around 40%. In addition, the earn-out period ranged from less than one year to more than five years, with a median of 24 months.

Earn-outs have often half-jokingly been referred to as "litigation magnets" since disputes regarding whether the earn-out was have become common.?

Some of the disputes have been due to ambiguous metrics for determining whether the earn-out triggers were met, changes in the buyer's operations post-closing, the allocation of expenses, and the difficulty caused by changing circumstances (especially when the earn-out period is more than two years).

As a result, in the pre-COVID world, earn-outs were imperfect tools used only when absolutely necessary to bridge the valuation gap between buyer and seller.

In the post-COVID world, however, earn-outs will become increasingly popular?to allocate more risk to the seller for the uncertainty of future performance. As a result, buyers will insist on earn-outs in a higher percentage of transactions. Seyfarth Shaw expects them to increase from the current 18% to perhaps 30% to 40% of deals or higher.

For sellers, this shift emphasises the importance of bankable growth and predictable operations and margins.

Source: seyfarth.com

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This Week's 3 Business Books

Free for you as a subscriber to my newsletter: Three of the world's most essential and popular business books in acclaimed 12-minute videos. Listen, or watch and listen to take advantage of another big idea.

Book 1: Sales Growth by McKinsey (watch on Monday-Tuesday)

A team of global leaders from McKinsey's Sales & Marketing practice led comprehensive research and interviews with more than 120 of today's most successful sales leaders across various industries.

The results led to Sales Growth, one of the first comprehensive books on sales management discipline.?

Watch or listen to Book 1

Book 2: Permission Marketing by Seth Godin (watch on Wednesday-Thursday)

In 1999, Seth Godin estimated that the average consumer sees about one million marketing messages annually. Today that number is likely to have doubled. So how do you get your customers to pay attention to yours?

By making information about your favourite product – in effect, the advertisements – anticipated, personal and relevant, the vendor has captured your attention, and you are willing to devote your scarce resources to it.

Watch or listen to Book 2

Book 3: The Four Agreements by Don Miguel Ruiz (watch on Friday-Sunday)

Thousands of years ago, the Toltecs were known throughout southern Mexico as people of knowledge, and Ruiz believes that if we follow their advice, we can attain "personal freedom".

Watch or listen to Book 3

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Read past editions of the newsletter?here .

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Email me at [email protected] or message me with any questions.

? Previous Newsletter:?Timing Makes Deals, and Timing Kills Deals - How To Avoid Seller's Remorse

? Next Newsletter:?How You Attract A Strategic Buyer, Attain Your Deep Purpose, and Preserve Your Legacy

Keep winning, Walter

P.S.?If you know you’re ready… it might be time to explore my?Proactive Exit Mastery?model , to see how you might capture the ultimate exit value for your business.?If you'd like to know a bit more, just message me or comment below with "Ultimate Exit Value".