Deal Structures in a Post Covid World

First off, I’m using the term “post-covid” gingerly, since, as I am writing this article, we are going through a surge of the Omicron variant. This article is intended to shed light on deal structures that we saw in 2021 and compare them to pre-covid years, as well as surmise future structures.

Remember when we had no fear of going to a sold-out concert or, on a smaller scale, an elevator with someone other than yourself? In this new world, regardless of any future variant surge, we must perform our own internal risk/reward analysis and press on with our daily activities. Do we get vaccinated and wear a mask to attend that crowded concert or get in that elevator? Or do we roll the dice? Buyers are no different with their current approach to acquisitions.

Prior to Covid, buyers and sellers alike were riding the wave of year-over-year gains with no slow down in sight. Therefore, buyers were willing to perhaps pay (risk) more cash at closing in a transaction as opposed to structuring some sort of post-closing compensation. A great economy, low-interest rates, tax-favorable environment – all the stars were aligning in every analyst’s favor when evaluating acquisitions.

Then in March 2020, the world we know changed because of a virus. Much like the attack on the World Trade Center in 2001 changed the way we all experience air travel, Covid and the awareness around the potential of future viruses has changed the way we conduct our daily lives. I probably can count on one hand how many times I was on a business video call before Covid and now have no idea how many I’ve been on in the past two years. The buyers in 2021 understood that 2020 was a challenging year. However, they were now asking the sellers to share in the risk of rebounding in 2021.

The silver lining to this story is that buyers were still upholding valuations of businesses like the good ‘ole days prior to Covid; however, to do so, they were asking sellers to be flexible around the timing of their consideration. Instead of the pre-Covid 70%-90% cash at closing structures that were common in many lower to mid-market industry transactions, we’ve seen the cash at close percentage tick downward to 60%-80% to offset the risk of a company potentially not rebounding to pre-Covid numbers in the near future. This was the case in all but a few industries that seemed immune to the effects of Covid like that one co-worker who never stopped going out to crowed bars in 2020 and somehow evaded the virus. The additional “structure” in the deal comprised of a seller holding a note or agreeing to an earnout based upon future earnings or rolling equity alongside the new owners.

There are many additional ways to skin the proverbial cat other than the above-mentioned when it comes to structuring and quite frankly, it’s the most interesting part of the acquisition process. That’s when a good advisor is worth their weight in salt. The more open sellers are to structure, the more they tend to gain in the overall transaction value. I’ll admit, it can be difficult to see the forest through the trees when negotiating a deal. However, savvy sellers realize that buyers are ultimately interested in growth and willing to pay extra for a seller’s years of industry experience. Buyers love it when sellers want to participate post-close, and sellers often experience greater returns than they ever could have accomplished on their own.

So, what does 2022 have in store for us in the way we structure transactions? Who knows for sure? We can surmise that it will continue to look a lot like 2021 with a combination of cash at close and some structured post-close considerations. We anticipate access to capital to be plentiful, valuations to remain seller-friendly, and the appetite for growth through acquisition to exceed the previous year.

  Author
  Matthew Kekelis
  Transaction Director
  Benchmark International

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