In an acquisition situation, there almost always is a price expectation difference between the buyer and the seller.
The most important factor in closing that gap is whether the buyer and seller really want to do a deal. And also how much their advisers help to accomplish this.
Here are some ideas on how to close the gap through deal structure.
- A subsidiary is created for the fastest-growing part of the business, in which the buyer/seller share 50/50 in the best-performing part of the business.
- The next generation of sellers could take back 10% of the transaction in preferred stock.
- Use a call option. For example, the buyer acquires 70% of the equity with a call on the remaining 30%. This can be spread out, say 10% a year for three years.
- Buyer pays a royalty on sales rather than gross margins or EBIT.
- The buyer pays a higher rental as part of the purchase price which reduces goodwill.
- The buyer leaves the real estate with the seller and then rents it back. This will reduce the company’s sale price and provide some ongoing income to the seller.
- The buyer leaves the machinery and equipment with the seller and then leases it back from the seller. This has the same effect as with real estate (above).
- Sell only a specific product line, if that is what is of most interest to the strategic buyer. Leave the rest of the business to be sold to another buyer.
- Pay attention to prior transactions, some buyers may work with others in purchasing the company and then repurchase from each other. However, make sure you consult with your tax advisor and attorney before doing this.
- Make sure that your advisers are competent and knowledgeable about the aspects of the sale they are advising you on. The areas of business valuations, structuring, tax, and so on are all different. One person almost certainly doesn’t know about all the areas involved in a transaction.
Other things to consider for international acquisitions.
- Different cultures have different practices that are sometimes not codified in law. For example, the pride of ownership is sometimes stronger in some cultures than in the USA. A transaction in such a situation could be structured as selling 49% to an outside buyer, and selling another 11% (or more) to a trust controlled by the buyer. The remainder is retained by the seller. Though the buyer controls the company, it appears that the seller has retained a significant interest in the company.
- Establish a holding company for the intangibles (patents, trademarks, etc.) in Switzerland for the European seller. The buyer can make a payment for these assets alone and avoid capital gains tax on that part of the business. Consult a tax advisor before doing this.
- Another example of an international deal structure with, perhaps, some tax implications has the seller’s ongoing consulting agreement paid by the USA parent (acquirer) to the European seller, instead of having the acquired European company pay the consulting business. The seller may be able to have a tax treatment as tax-free because it is not reported inside the EU. Consult a tax advisor before doing this.
Perhaps the best tactic is to find aspects of the transaction other than price, that are important to the seller. Examples could be retaining the name of the company, continuing the involvement of the seller in the company, and retaining existing employees, among other things.
