Common Deal Structures: Analysis & Evaluation
In the telecom agency M&A space there are three traditional ways to structure a dealstock purchase, asset purchase and a merger. These structures aren’t mutually exclusive, as they can be creatively combined to achieve a more flexible end result.
Stock Purchase
In a stock purchase, the buyer acquires all, or at least a majority, of the seller’s outstanding stock. Under this structure, both the seller’s assets and liabilities are transferred to the buyer. Typically, the tax implications for the seller can be more advantageous under a stock purchase structure and the cost of closing the deal may be more economical. For the buyer, however, the fact that liabilities transfer can be a significant downside. And if there are multiple shareholders who are not fully aligned with the sale, complications can tie up or even torpedo the deal altogether.
As with any important business decision, the seller should consult with legal, tax and other professionals to ensure that all implications of a deal are understood.
Asset Purchase
With an asset purchase, the buyer and seller agree to an asset transfer, leaving both known and potentially unknown liabilities behind. As we discussed in the article on valuing your agency, telecom agencies don’t typically have “hard” assets like equipment and inventory. That said, the future stream of residual commissions is a valuable asset and deals are usually structured around that asset.
While most telecom agency sales entail the sale of all assets, there may be exceptions. An attractive aspect to this deal structure is that the buyer and seller can choose only certain assets to include in the transaction, allowing other assets to remain with the seller. And for the seller, the company remains a corporate entity post-sale. Asset purchases can take longer to close than stock purchases since it takes time to work through which assets are included in the deal. There may also be higher tax implications for both parties, and sometimes, there are assets that are not transferable.
Merger
Instead of more traditional sale, a merger is when two or more companies come together, sometimes forming a totally new entity. The combined assets and liabilities of the individual companies become part of a combined entity, which may utilize the structure of one of the original companies or may flow through to a corporate entity. While not common in the telecom agency space, this deal structure can be advantageous based on the specific needs of the parties.
Deal Formulas
Regardless of the deal structure, the great majority of telecom agency deals include an up-front payment with payment of the balance of the purchase price over time. The payment over time can take several forms:
First, it can be based on a negotiated, fixed purchase price with the payments being made in installments (with or without interest) over time. Or, those future payments can be tied to the performance of the base that was sold. Such a structure enables the buyer and seller not only to share the risk of retention of legacy sales to the transferred customer base, but also allows both parties to participate in the upside potential of new sales into that same customer base. Basically, shared risk and shared additional reward. Below is a visual representation of this kind of deal structure:
Most often, the future portion of a deal structured similar to the one above has a percentage scale that changes over time. For example, over a 4-year time frame, the profit-sharing from year to year may move from 80%/20%(Seller/Buyer), to 60%/40%, to 40%/60% and finally to 20%/80%. Of course, the options are only limited to the creativity and flexibility of the buyer and seller.
Regardless of the specific deal structure, a foundational element of all deals is this: the more cash paid up-front, the lower the overall price. Conversely, when more of the transaction balance is paid based on the future performance of the purchased base, both legacy and new sales, the overall value of the deal can increase significantly.
The Process
One thing that we have yet to touch upon is the general process that telecom agency owners should expect to encounter as they consider selling their companies.
While there may be additional, or excluded steps, the overall sales process typically includes the following:
Finding each other
Executing confidentiality agreements
Initial due diligence (on both sides)
Letter of Intent
Full due diligence
Purchase agreement
It’s critical that the seller enters their due diligence process with a clear understanding of what they think their company is worth (and ready to defend that valuation) AND how they prefer to have the actual deal structured. Perhaps most importantly, both the buyer and seller must come to the negotiating table willing to be creative and flexible if they each hope to reach a successful outcome.
Sellers who are serious about maximizing their results in this process will often create a seller’s book to showcase the value of their company. Often called an Offering Memorandum or Confidential Information Memorandum, the seller’s book is put together by an M&A advisory firm if the seller has retained such services. But even if a seller not using a third-party broker, creating the seller’s book is a very useful exercise in assimilating relevant information about the company.
Interested in learning more about how to determine the value of a telecom business? Contact us for more information or to schedule a consultation.