September 2024 – A Deal Terminology Reference Guide

A Deal Terminology Reference Guide

Imagine yourself progressing through the diligence process for a potential partnership. You’ve signed an NDA, provided financials, job data, org charts, and have been on several calls answering questions and getting to know your potential partner.
 
You begin discussing specifics about which deal structure works best for you (hopefully these discussions are happening before the Letter of Intent is signed), and you realize the potential partner doesn’t see eye to eye with you on what a fair structure looks like.
 
After all that time spent getting to know them, providing information, and being transparent, it becomes clear things aren’t going to work out.
 
The goal of today’s email is to highlight a few terms commonly used when structuring a deal so owners are better equipped to ask the right questions and can rest assured they’re proceeding with the right potential partner.
 
It’s no surprise that the structure of a deal can make a substantial difference in what you ultimately earn, and structures vary widely throughout the industry.
| Reinvestment / Equity Rollover
The ability to invest a portion of the sale proceeds back into the stock or equity of the acquiring company/entity.
 
Considerations:
While the option to reinvest can result in very lucrative future returns, it's important to know who you're investing in and whether their business model is compatible with yours. It's also important to understand if rollover is an option or a requirement, and whether you believe that owning equity in the buyer is a good investment.
| Multiple
The total value of a company divided by a measure of its profitability.
 
Considerations:
A ”multiple” should be calculated on the holistic assessed value of a business rather than simply applying a multiplier to an assessment of earnings at a particular point in time.
| Earnout
A condition where the seller will obtain the remainder of the purchase price in the future if/when the business achieves certain milestones.
 
Considerations:
Earnouts can be difficult to achieve since the former owner no longer retains complete control and can create misaligned interests. If you have an earnout as part of your deal, make sure it’s tied to objectively verifiable measures and that the calculation is based on things you can control during the earnout period.
| Letter of Intent (LOI)
A document outlining the terms of a deal between the buyer and seller which they intend to formalize in a legally binding agreement.
 
Considerations:
The more detailed and specific the LOI is, the more likely both parties are to avoid surprises later in the diligence process. Caution should be taken when an LOI is presented before substantial diligence work, as it could be used to commit a seller to exclusivity, only to later decrease the offer price as due diligence progresses (known as a “retrade”). Ask for references on the buyer, their track record for doing what they say they will, and how closely they stick to the original LOI.
| Escrow
A portion of the sale proceeds temporarily held back at closing. Typically consists of 10-20% of the total proceeds, which is held back for 12-18 months.
 
Considerations:
Use of an escrow account can substantially increase the time it takes for a seller to receive all of their closing proceeds and can pit the buyer and seller against each other when determining how much of the escrow will be released back to the seller. Reps and Warranty Insurance (RWI), an alternative to escrow, is a policy that provides coverage for any breach in representation. It allows the seller to get all cash at closing and any claims are made against the insurance, rather than the seller’s escrow account. 
Curious about the HighGround approach to deal structures? Reach out to us when you’re ready, and we’ll go into as much detail as you’d like. 

Together, we turn Chaos into Calm.
Best, 
Griffin Brand, VP of Corporate Development
P.S. We recently interviewed Kevin Bunce, founder of AllKlean in Post Falls, Idaho. Kevin shares his journey from water tech to President and his insights on partnership considerations. Click here to watch now!
| What we look for...
 
+ Residential water mitigation focus
+ Independently owned
+ Strong leadership team
+ Growing, scalable business with a great local reputation 
+ EBITDA $1.25M+
All previous editions of the newsletter can be accessed here.
No longer want to receive these emails? Unsubscribe.
HighGround 3701 W Royal Ln. Irving, TX, Texas 75063

Comments are closed.

Sign Up for Our Newsletter