No universal method for mergers and acquisitions

Every merger and acquisition (M&A) transaction has its unique features that can include earn-outs, part sales, and deferred considerations. Adrian Benson, a partner and head of corporate M&A at Dillon Eustace, emphasizes that there is no one-size-fits-all approach when structuring a merger or acquisition. “Both buyers and sellers typically consider what type of structure would be most beneficial and acceptable to each counterparty,” he says.

According to Mary Kiely, a corporate partner at Eversheds Sutherland, understanding the right deal structure for your specific situation is crucial, whether you are on the sell side or the buy side. Various factors influence deal structure, such as deal funding, the parties’ risk appetite, and the regulatory landscape. Kiely points out that a simple deal structure where 100 percent of the purchase price is paid upfront on the same day can be seller-friendly as it offers deal and price certainty.

However, achieving such a straightforward deal structure may not always be possible due to regulatory approvals dictating deal timing or funding constraints affecting payment terms. In some cases, sellers may have to agree to deferred or earn-out considerations, such as completion accounts, earn-outs, and anti-embarrassment protection. These structures have become increasingly common in recent deals as they help in risk allocation between the seller and the buyer.

Earn-out structures involve the seller being paid only if the target meets specific financial milestones within an agreed period, providing the buyer with valuation comfort. On the other hand, deferred consideration structures offer more payment flexibility and allow for warranty claims. The type of target business can also influence how the purchase price is paid, with renewable energy sectors often using deferred consideration structures and consumer and retail sectors more inclined towards sales-based earn-outs.

One drawback of not receiving the full payment upfront in cash is that the seller may need to cover transaction costs and tax liabilities from their own resources. Share value fluctuations or difficulties in exiting the deal later are also risks associated with these structures. Part-sale structures are commonly seen in management buyouts and private equity transactions, adding complexity by requiring negotiations on shareholders’ agreements. Companies must carefully evaluate which structure best suits their business, considering factors like tax implications, financing availability, and the impact of financing with debt or equity on both parties.

In conclusion, every M&A transaction presents unique considerations in structuring deals to accommodate both buyers and sellers’ needs. Understanding the benefits and downsides of various deal structures is essential for a successful transaction tailored to the specific circumstances of the parties involved.