Mastering the Art of Deal Structure For Business Acquisitions

Welcome back to the Deal Mastery Insider! Today, we're diving into deal structure and funding for business acquisitions. If you're a business owner, investor, or acquisition entrepreneur, understanding these building blocks is critical to getting your deals closed.

Funding your Acquisition

The Five Pillars of Deal Structure

When it comes to crafting a deal structure, understanding the fundamental components is crucial. Here are the major elements of deal structure:?

1. Cash: This is your starting point, whether it's from your existing resources or raised externally through investors or debt capital. Cash is a fundamental staple of most deal structures.?
2. Stock: Trade ownership in your existing business for equity in the new acquisition. This not only preserves cash but can also align interests between parties.
3. Seller Financing: The seller provides a loan for part of the purchase price. This can be a win-win, easing the financial burden for you while giving sellers continued interest in the business's success, and an ability to generate additional income via interest.?
4. Earnouts: Contingent payments that are usually performance-based, often tied to revenue or other metrics. They provide security for buyers and a potential upside for sellers and can be a great way to bridge a valuation gap.?
5. Creative Structures: Think outside the box with options like acquihires, business giveaways, or SEEDS (Sweat Equity and Earn-In Deals). These innovative strategies can minimize upfront costs and create value in unique ways.

Unpacking the Deal Stack

Every business acquisition is like a jigsaw puzzle, and these building blocks can fit together in countless ways. A $10 million deal might include a mix of cash, stock, seller financing, and earnouts. For instance, a typical scenario could involve 70-80% cash with the remainder split between seller financing and earnouts.

Where to Find Your Funding

Now that you know the pieces, where do they come from?

• Balance Sheet Capital: This is your existing cash reserves. If you're cash-rich, you have the luxury of flexibility.
• Investor Capital: Raising funds from investors can inject much-needed cash into your acquisition strategy, either directly into the business or via SPVs (single purpose acquisition vehicles).?
• Debt: Loans can provide the cash payment needed for a closing payment, paid back over time from acquisition’s earnings.

Creative Deal Structures: The Wild Card

These aren't just the icing on the cake—they can be the cake itself. Creative structures can reduce or even eliminate the need for cash at closing, offering innovative solutions to funding constraints.

• Acquihires: Acquire a company primarily for its talent and integrate it into your business.
• Business Giveaways: Take over businesses that are otherwise closing, often for minimal upfront costs.
• SEEDS: Involve sweat equity, allowing you to put in the work for ownership stakes.

These strategies can transform deals, creating ways to close deals that otherwise may not be achievable.?

Deal Structure as a Funding Source

Understanding these building blocks can help you get your deals funded and over the finish line. A key lessons here is also that creative structure can be your funding mechanism by itself if you can set a deal up the right way.?

By mastering these elements, you can approach business acquisitions with confidence and creativity. Deal-making isn't just about capital; it's about strategy, negotiation, and innovation.?

I hope this helps you think through the building blocks of your next deal and if you have any questions, let me know!?

See you next week.?

-Matt?

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