Changes in Deal Structure

Changes in Deal Structure

Shoot The Moon
Shoot The Moon
Changes in Deal Structure

The second half of 2020 will bring increased consolidation of distressed assets and deal structure creativity.


With companies looking to ascertain valuation considerations based on how their businesses performed pre-pandemic, its highly likely an increase in transactions involving earnouts will be realized in the second half of 2020. Allowing sellers to earn back performance over time can accelerate the successful closing of a transaction that would have otherwise stalled out due to adjusted valuations resulting from the economic downturn.


Stock vs Cash as Currency: 

With acquiring parties seeking to preserve cash and realize traditional sources of debt financing may be more limited, buyers are likely to pursue transactions using their own stock as currency to fund the transaction.

While sellers may be hard pressed to give up the notion that cash is king, at least they will be able to share in the future growth of the business and benefit from tax treatment on earnings associated with the sale. A stock-swap may also help the buyers afford to offer a slight premium in valuation.


Seller Debt Financing:

With transactions involving cash, it is probable that we will see an increase in seller financing as alternatives to traditional debt restructuring.  Sellers can leverage sale proceeds as a loan back to the buyers to help alleviate issues surrounding questionable debt that could be sitting on the balance sheet. This avoids holdbacks resulting from uncertain or unsubstantiated debt from prior business. Having the seller hold these Notes keeps the parties mutually motivated to settle the debt in an efficient manner.


Forcemeisure / Material Adverse Effect: 

We are seeing an increase in transactions where the parties are carving out certain Material Adverse Effects (MAE), such as COVID-19 and the financial fall-out resulting from it.

The clauses are meant to protect both parties and these carve-outs can leave buyers very exposed. Leveraging an advisor on these terms can have a substantial impact to the potential fallout resulting from acquirers walking away from deals for defendable reasons vs convenience. With the anticipated increase in consolidation of distressed assets in the second half of 2020, it’s imperative that buyers and sellers are aware of the likelihood of a transaction never completing.


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