How do I structure a deal?
This is where you will need some support from a corporate financier/ M&A accountant. The structure will totally depend on a number of things:
- The cashflow of the business
- Any capital expenditure envisaged over the first couple of years
- How long the business has been on the open market
- The seller’s appetite for accepting a deferred payment plan
- The typical level of cash generation of the business and the ability of the business to repay new debt taken on by the buyer to fund the purchase
- The funding multiple available from a funder who might be keen to back the deal
- Other facets specific to the business and the sector in which it operates eg long term contracts and how the business receives and recognizes income for these, including retentions, etc
- The amount of personal capital being introduced by the buyer into the transaction
- Whether there is more than one buyer looking to undertake the transaction
The typical structure of a transaction to buy a private business might look something like the following:
If for example, the target business has a valuation of £1m (based on 4x £250,000 ebitda), then buying 100% costs £1m. The buyer is going to introduce £100,000 personal capital and typical deal costs are assumed at £120,000.
- An assumed completion payment of 60% equates to £600,000.
Add in the deal costs of £120,000 makes £720,000.
Deduct the capital introduced by the buyer, say £100,000.
That gives a net amount to finance of £620,000.
- Alternatively, an assumed completion payment of 70% equates to £700,000.
Add in the deal costs of £120,000 makes £820,000.
Deduct the capital introduced by the buyer, say £100,000.
That gives a net amount to finance of £720,000.
- Regarding funding, consider the two scenarios:
- If a funder will offer 2x ebitda multiple, this generates a funding pot of £500,000. The buyer needs to find additional capital of between £120,000 and £220,000 subject to whether the day1 payment is 60% or 70%
- If a funder will offer 2.5x ebitda multiple, this generates a funding pot of £625,000
Under this scenario, the buyer needs to find additional capital of £0 if the completion is 60% but £95,000 if the completion payment is 70%
Therefore, it is easy to see how the day 1 payment, combined with the multiple offered by the funder, massively affects whether the deal can be funded or not.
Playing around with these sort of figures for different sizes of business and transaction value, combined with day1 completion percentages will give you a good feel for what level of transaction can be executed given the level of personal capital to invest.
