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.
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.
See How I Can Help You With Your Fundraising Efforts
- Fundraising Process : get guidance from A to Z.
- Materials : our team creates epic pitch decks and financial models
- Investor Access : connect with the right investors for your business and close them