CHAPTER 15 Deal Terms Flashcards
(26 cards)
What factors, other than price, does a seller consider when evaluating an offer?
Source of funds, payment timing, asset vs. stock purchase, process duration, and post-sale involvement.
Why are these non-price factors important to a seller?
They help the seller assess the buyer’s seriousness, ability to close, and post-sale intentions.
What percentage of acquisition cost do senior loans usually cover?
Between one-third and one-half.
What is a senior loan?
A loan that has first claim on a company’s assets and cash flows.
What are key features of an SBA-backed loan?
Up to 80% of acquisition cost, lower cost due to partial government guarantee, long-term (10 years), fewer covenants.
What are the drawbacks of nonbank lenders?
Higher costs and more stringent covenants.
What are common requirements of senior bank loans?
Collateral, personal guarantees, and performance-based covenants.
What role does seller debt typically play in a deal?
Finances about one-third of the purchase and keeps the seller invested in post-sale success.
What are typical features of seller notes?
Subordinate to senior loans, slightly higher interest, usually no personal guarantees, often include restrictions.
What is an earn-out?
Deferred payment to the seller based on future company performance.
How did Greg Mazur use an earn-out in his deal?
Paid $1.24M upfront, with 1% of sales over 5 years as an earn-out to close a valuation gap.
Who are typical equity investors in small business acquisitions?
Family, friends, and high-net-worth individuals.
What do equity investors usually expect before repayment to the buyer?
Their capital to be repaid first.
What info do equity investors want before investing?
Business details, performance history, deal terms, return potential, and debt strategy.
What are the two main types of acquisitions?
Stock purchase and asset purchase.
Why is an asset purchase generally more favorable to the buyer?
Avoids undisclosed liabilities and has tax advantages.
When is a stock purchase more practical?
With C-corporations due to tax consequences or hard-to-transfer licenses/contracts.
What does ‘debt-free, cash-free basis’ mean in a deal?
Seller pays off debts and keeps any cash before closing.
What is a working capital peg?
The target net working capital at closing used to adjust the final purchase price.
Why is a peg necessary?
To avoid overpaying or needing to inject cash right after acquisition.
How long does closing an acquisition typically take?
At least 3–4 months.
What is an exclusivity period?
A timeframe (typically ~90 days) where the seller negotiates only with the buyer.
How long should a seller typically stay involved post-sale?
About 3 months full-time, with access for up to 1 year.
Why not keep the seller involved for too long?
It can stall the organization and reduce buyer autonomy.
