Staged Acquisitions

Overview

Are you trying to buy a business, but the seller wants too high a price?

Are you trying to buy a business whose seller is an important part of the business and willing to continue to work?

Are you trying to buy a business, but do not want to get overleveraged?

Opportunity

Seller’s often have an amount of money that they want for their business that is often well in excess of what the business is worth today.  

Many owner-operators of businesses often grow their company to a certain size and then need help to continue their growth.
 
There are often many good reasons to acquire a business, but you are concerned with taking on too much debt that might hamper the company’s ability to grow in the future or could even threaten the survival of the company.

Solution

Instead of abandoning all hope of acquiring a business for which the seller is demanding too much, consider buying some of the business now and the rest later.  With a staged acquisition, you avoid overpaying for the business and the seller, over time, ends up receiving the total sales proceeds that he or she wants.   

When it is important for the seller to remain with the company after closing to help ensure its success, it is also important to continue to provide the seller with an incentive (other than a salary) to do whatever is possible to help the company continue to increase its profitability.  With a staged acquisition, the seller’s retained equity interest in the company provides such an incentive.

Because a staged acquisition involves only acquiring a portion of the company initially, the seller’s retained ownership often provides most, if not all, of the equity required to do the transaction.  Consequently, the initial cash required can often be obtained with a combination of bank and mezzanine debt. 

Avoiding Common Pitfalls

Often, everyone’s best initial intentions are affected by changes in the business.  Accordingly, it is important that all employees and owners have a clear understanding of their responsibilities and that there be a written agreement that contains a dispute resolution mechanism.

It is preferable to have the seller’s retained equity interest be subject to redemption by the Company at a price determined by a pre-agreed upon formula.  This provides the buyer with the option to acquire the balance of the Company without the need for any further negotiation.  However, you must make sure that the seller does not have the right to put his retained ownership interest back to the Company prior to the repayment of most or all of the debt incurred to acquire the business.