How To Structure An Acquisition Deal

How to structure an acquisition deal? Acquisition deals have become extremely common in the past decade with high-profile acquisitions making international news. However, acquisitions are not simple and they require a lot of preparation and expertise. The acquisition process involves more than just signing a few legal documents to walk away victorious from the deal. With that said acquisition is definitely beneficial for both parties involved granted that it is completed successfully.

The selling party that has invested their blood sweat and time in their business wants to get the most value for their efforts during an acquisition, while the buying party wants to make sure they are investing in a solid business with a potential for returns. Every stakeholder in an acquisition deal plays their role be it the decision-makers, lawyers, accountants, or the owners to make an acquisition successful.

With that being said, it is important to make sure that all the efforts you are making towards your business sale or purchase are taking you in the right direction. That is where an acquisition deal structure comes in. If you have never closed a deal before or are not used to the merger and acquisition process, then you’ve landed in the right place. In this article, we will take an in-depth look at what an acquisition deal structure is, how you can structure an acquisition deal, and what you can do to help swing the deal in your favor. So without further ado, let’s dive straight in.

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.

What is an acquisition deal?

An acquisition is a financial deal between two parties. Interest or shares in a company may be traded by one party in exchange for shares in the other party. Or it may be an all-cash or partial cash deal.

If an entrepreneur manages to close an acquisition deal, they can potentially get an early retirement or leave the business to grow a new startup. The acquisition means the seller can rid themselves of most if not all responsibilities of running the business as it then becomes the responsibility of the acquiring party (buyer).

A quick Google search can show tons of companies that flourished after they acquired a company, one of the most popular being Pixar getting acquired by Walt Disney Co. So in short, an acquisition can result in a solid business structure for the acquiring party. However, just like most business aspects, a successful acquisition requires both parties to come together to make sure the transition goes as smoothly as possible.

What is an acquisition structure?

Understand that you must structure an acquisition deal before it can be closed. Without a formal acquisition structure, it will be difficult to transfer the ownership of the business. In short, an acquisition that lacks a formal structure may end up damaging the interests of the buyer or the seller.

So, an acquisition structure is a business structure carefully planned to carry out the sale or purchase of a company or a business asset. It refers to an overall system where the company’s approach is broken down into cash and non-cash components.

You can also include other transaction details in the structure, such as shares or selling of assets, stocks (if any are to be transferred), material items, and other terms and conditions along the transfer journey.

The acquisition structure also has terms about future liabilities, customer lists, trademarks, brand names, property, and tangible items in its inventory. All these points are crucial so that the transfer is done smoothly and in favor of both parties.

The most critical facet o structuring an acquisition deal is knowing how to value your company. That’s how you ensure you get the best price for it. Not sure how? Check out this video I have created explaining in detail how that’s done.

Why is an acquisition deal important?

Knowing how to structure an acquisition deal has the following benefits.

Outlines the rights and obligations:

When you structure an acquisition deal correctly it allows both the buyer and the seller to work together and decide the rights and obligations of both the buyer and seller. Since it is a binding agreement both parties are then bound to fulfill their obligations making the acquisition process much easier.

The flow of capital:

Many business people believe that an acquisition is the same as a merger or takeover; however, the distinction lies in the movement of funds. Capital flow is often from one side because a larger corporation acquires the smaller one.

The smaller company may not be able to arrange finance or take out loans. The higher value business makes decisions about enabling the business and taking it to new heights.

The input of experts:

When small companies join more prominent entities, they can access a team of experts for advice on key aspects of the acquisition. The experts can not only help you overcome any hurdles but can also provide valuable insight to help improve the acquisition process. Once acquired the acquired business may benefit from many new experts helping to grow the business.

Revenue growth.

When a new company or business is formed after the acquisition deal, revenue and other competencies may rapidly grow. The long-term financial position of the new company gets better. Imagine plunging in the product of a startup to Google, which could result in reaching billions of new customers overnight.

Open to new markets:

The acquisition process may lead your business to new markets nationally and internationally. Since a team of experts will be working on market research and development of the products, your firm will likely acquire a new and broader range to the target audience than the previous one.

Market shares:

When a company is formed through an acquisition, there is a probability of taking over the relative field by storm. The acquisition structure clarifies what to do about the competitive edge and challenges faced in order to climb the ladder faster.

Apart from the obvious benefits, you can tailor other ideas into a structure that can suit your financial needs. It will lead to new horizons and fulfill the purpose of the acquisition.

Structure of an acquisition business deal

The formulation of a comprehensive acquisition deal structure is one of the most important steps in the acquisition process. The goal is to provide a solid foundation so that the results of one’s judgments, choices, and decisions do not have unintended consequences.

Generally, an acquisition structure is based on the following phases.

1. Create a rough draft:

It is the first rule of how to structure an acquisition deal is to create a rough draft of the business acquisition plan. If the rough draft is compelling enough, you can quickly move on to the next step. Don’t forget to include financial data, as well as strategies for reaching your target audience and launching products or services into the market.

If the experts finalize the rough draft in the initial stage, move on. Or, you can alter it multiple times till both parties agree on the points included in it.

2. Detailed description:

This section clearly outlines why you want to acquire the company. It also includes the calculations of what you are willing to pay. It will help you identify all weaknesses to rectify and iron them out to generate value.

You can include financial headlines, a breakdown of the company’s assets, corporate structure, and a SWOT analysis.

There are a lot of different ways that you can amend the details at this stage, but it is dependent on the brand in question as well as the policies of the firm. Document each and every aspect of the task so that it may be verified afterward.

3. Elongate the market details:

Whether you are an entrepreneur, founder, or director, you must study the market before you leap into it. You may be thinking about global competitors and base all your decisions on the global market, where in reality you are operating a smaller business and have less competition.

Focus on the granular details like the target customers, demand for the product, franchise, and business launch. It will help you save not only time but also resources and a significant amount of money along the way.

The phase in which you structure an acquisition deal will clarify all financial policies and highlight their loopholes.

4. Focus on sales and marketing:

The fourth phase of the acquisition structure deals with the sales and marketing of the company or product. You can review the sales of each product and compare them to your products. You will have a clear idea of what the customers require. Moreover, you can list the hot selling products and market them accordingly

In addition, if the findings of your research indicate that investment in a certain stream of marketing, for example, social media advertising, is insufficient, then you should maybe focus your efforts on email marketing instead. There are many techniques where you can tactically reach your target audience and approach them with your service or product.

5. Summarize:

At the end of the process, summarize the acquisition structure details. It will help you understand the shortfalls and the strong points of the acquisition. Moreover, the final projections are the starting points of any future transactions; hence it is essential to understand them and work on them with utmost care and caution.

6. Plan the transition carefully:

This phase will determine how to transfer from the previous owner to the new owner. It is all about who will control the business and company. Since the transitional phase is often extensive, keep an eye on the financial structure, customer relationship, and ongoing contracts.

There are hundreds of stories of successful acquisitions. Yet, the vast majority of deals fail in the integration stage.

7, Supporting documents:

Paperwork and record keeping are a part of running a successful business. Therefore, it makes sense that both parties (especially the seller) have to produce all the documentation to make sure that the transaction of business and assets runs as smoothly as it possibly can. Sellers will have to maintain a record of previous tax returns, audits, customer sales, and ongoing expenses because the transaction method and structure will depend massively on these. So, take the time to understand how to structure an acquisition deal.

Keep in mind that in fundraising, storytelling is everything. In this regard for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

Features of an acquisition

Acquisition features depend on a few essential elements for both parties concerned. Keep them in mind when figuring out how to structure an acquisition deal.

Focus on these 6 factors:

1. All details must be transparent to both sides. There will be problems later on if there are hidden glitches, and the process can turn problematic. Moreover, there will be a strain on the finances as you’ll have to spend money to hire a different team of experts to help solve the problems.
2. The two parties should communicate regularly, possibly daily during the acquisition process. Communication is one of the only ways to help ensure that the process runs smoothly.
3. Have some defined goals before you go to purchase another company. If there are no defined goals, how would you run the company? Hence, it is necessary to plan for the future and merge it into the structure. Talk to experts or your legal team about this process and clear any doubts that you may have.
4. Hire a qualified team that can manage the transition with excellent execution. Due to the extensive amount of paperwork required, this is a procedure that should be left to the professionals. There are also legal processes and papers that you have to sign, so it’s critical that you employ a strong legal team.
5. Don’t forget branding. Forming a new company may not be ideal in every single acquisition, and it is possible to align the target company with the functions of the acquiring firm. You can create a shared vision with the team of board members and generate better value for the company. In some cases, if the acquired company had a stronger brand, that may be adopted.
6. Planning is another component and an essential feature of the acquisition process. Know the steps, all the way through the closing, integration, and any vesting periods.

Is it worth it?

Acquisitions can be great. Yet, without a structure, there will be problems, and the process will not go as hoped. Moreover, there could be people who are prepared to take advantage of the structure’s weaknesses and drain you of your hard-earned resources and progress.

Learning how to structure an acquisition deal will give you an exact idea of how to take things ahead. It will clarify all steps along with the legal procedure.

Conclusion

The acquisition structure will give a clear idea of what steps to take at each milestone and alternative options in the case that something does not work out during an M&A deal.

If you are buying or selling a business, structure an acquisition deal plan first. You will be able to tell the difference in the process. Spending time on the acquisition structure will allow you to sail more smoothly through the transaction, and what comes next.

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