Structuring a deal for a smooth business exit
With some buyers likely to be more cautious in the months ahead, not to mention the true valuation of some businesses being tough to calculate due to economic uncertainty, what’s the best way to get deals done and ensure a smooth business exit?
Commonly, parties agree a business valuation based on historic financial reports and future projections. However, many businesses will be facing a reduction in revenue, and the uncertainty makes it difficult to accurately forecast.
For example, a business that’s seen sales dip over the past few months may make a strong recovery and see revenue increasing even a year from now.
A way around this potential blockage is to look at alternative valuations, including earn-out mechanisms based on actual future performance. This gives the seller a fighting chance to recover a more accurate valuation by allowing the business time to recover.
Parties also need to consider the structure of a deal. A seller expecting a straightforward exit may be surprised with a buyer reluctant to take on the full risk of the business in the current climate.
An asset-only acquisition, or taking a minority/majority stake, may serve as a risk allocation exercise. Alternatively, very risk averse buyers may look at partnerships or joint ventures to further share the risks of a deal.
The crisis may change the structure of a deal, but it’s still possible
This can be a positive move for sellers, who would then stand to benefit from the commercial experience a buyer may bring.
In short, the crisis may change the structure of a deal, but it’s certainly still possible to make the best of the current situation which will present opportunities for acquirers and vendors alike.
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