When exploring doing business acquisitions, how do you approach as en entrepreneur the structure of the transaction when thinking about cash vs stock acquisitions?
If you’ve taken funding for your startup or hope to, one day in the next few years you’ll either take your venture public or sell it. M&A offers can start coming sooner than you think. Before you start entertaining offers or having any conversations it pays to have some understanding of the different types of ways to get paid, and what they can mean for you.
Here are top considerations for choosing which offer to accept when it comes time to exit your startup.
Remember that mastering the storytelling side and how you are positioning your business is critical when it comes to engaging and speeding up the process. This is done via your acquisition memorandum. This is super important to reach a successful acquisition. For a winning acquisition, memorandum template take a look at the one I recently covered (see it here) or unlock the acquisition memorandum template directly below.
Here is the content that we will cover in this post. Let’s get started.
- 1. The Big Difference in Stock Deal vs. Cash Deal
- 2. Performance-Based Sales & Partial Payouts
- 3. What’s Trending?
- 4. Taxes, Taxes, Taxes
- 5. Asset Purchases as an Alternative
- 6. Fixed Shares or Fixed Value
- 7. How Soon Can You Sell Your Shares?
- 8. Ensuring Your Startup’s Survival
- 9. Synergy
- 10. Summary
The Big Difference in Stock Deal vs. Cash Deal
Harvard Business Review says the big number one difference between these two forms of payments is the risk. In an all-cash deal, you are out. Whatever happens to the business happens. You have no say or risk. You already got your money. However, it is a much bigger risk to your acquirer. All of the risks are on them and their shareholders.
Performance-Based Sales & Partial Payouts
It has become far more common for startup sales to be performance-based. You layout the forecast performance for the next few years and agree on targets together. You get some of your money from the sale upfront at the closing. The rest is contingent on maintaining those projected performance metrics over time.
Obviously, this first means you need to be careful about over-promising. You want to make those objectives very achievable. Secondly, you had better be happy with the initial payout sum, because that may be all you get.
M&A trends shift over time. During some periods stock purchases can be scarce. In others, it will be hard to get anything but an all-stock or majority stock offer. This is somewhat just impacted by the trends of the moment and the structure of similar deals that are closing.
The market makes a difference too. If money is cheap and interest rates are low, then it can make sense for bigger companies to borrow the money to buy you. If they have a lot of cash on hand and a few other great uses for it, then paying cash is far more attractive.
Taxes, Taxes, Taxes
Taxes should be one of the biggest considerations when considering cash vs stock acquisitions. It will make a world of difference in how much you actually get to keep. T
ax rates change, but you should have a good idea where they will be over the next year while you are waiting to close the deal. Taking cash will generally trigger a huge IRS bill. It’s like winning the lottery. You might give up 30%, 50%, or if some politicians have their way, even more than that.
A stock deal can spread out your gains over time, and lower the amount you’ll pay in taxes. This can get really complicated, so make sure you speak with a CPA and get personalized advice for your unique situation before signing.
Asset Purchases as an Alternative
Another alternative to the traditional stock or cash purchase is an asset purchase. The buyer purchases select assets from the company in a more streamlined acquisition.
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The advantages of this structure can be needing less due diligence, potentially not needing the approval of minor shareholders and speed to closing. The acquirer can benefit from limited liability and simplification. Though there can be quirks to work out, such as existing contracts and leases on office space.
Fixed Shares or Fixed Value
When negotiating a stock purchase, will you get a fixed number of shares or a fixed amount of value in shares? This can make a massive difference. If the stock’s value goes up by the time you close on a fixed number of shares, you could walk away with even more.
However, share values can often dip after an M&A announcement. Especially if the market really doesn’t see the synergy.
How Soon Can You Sell Your Shares?
As an M&A advisor will probably tell you, a stock deal doesn’t mean you have full liquidity to sell those shares either. You may be locked in for a period of time. How long will you have to wait and turn those shares into cash? That can mean a big risk of their value going down, and ending up with a small fraction of the sum you thought you were getting paid.
This performance can be a blend of both what the overall market is doing, and how well the company is managed under its new ownership. If the stock market is already overinflated and ripe for bursting, you may think twice before accepting an all-stock offer.
Ensuring Your Startup’s Survival
A big consideration in any exit is what will happen to your employees and the original team. Will their jobs and benefits be secure?
If an acquirer pays all cash it may be far more motivating for them to work harder and make it perform compared them raising money from a stock sale or borrowing.
At the same time, you don’t want to weaken the new owner’s cash position too much and increase the chances that they may fail or fall into financial trouble.
The synergy between the two companies is really important in an M&A deal when considering cash vs stock acquisitions. How much alignment and clarity there is can really determine the longer-term outcome.
That’s important for the employees and customers you care about if your startup will survive, as well as the future value of your stock and any additional payouts owed.
Unfortunately, despite the title you get, you’ll probably have near-zero control and decision making ability after the sale. So, you really need to make sure you are marrying the right partner beforehand. Take your time getting to know them over a period of time before committing.
The Ultimate Guide To Pitch Decks
The synergy will be something that will be discussed at the beginning when the potential buyer expresses interest after reviewing your acquisition memorandum. For a winning acquisition memorandum template take a look at the one I recently covered (see it here) or unlock the acquisition memorandum template directly below.
ACQUISITION MEMORANDUM TEMPLATE
Deciding who to sell your startup to, and for what type of currency can be confusing. That’s a big part of the reason I went on to start Panthera Advisors after exiting my own startup.
I also detail the stories of many other successful founders and their exits, and what they wish they did differently on the DealMakers Podcast.
The decisions between cash vs stock acquisitions can depend on the economic climate at the time, how much you believe in your buyer and the future of their company value, as well as your own personal goals.
If you need a big lump sum to start your next project or are only agreeing to sell on the premise of getting a life-changing amount of money for your family, then make sure you are paying attention to all the clauses and when you will get what. You can also take a mix of both stock and cash if you just can’t decide.