Money, money, money

So, you’ve sold your business and received the money in your bank... or have you?

Selling your business is a complex process and that complexity extends to how a buyer pays for it. In this article, we’ll simplify the technical aspects and clearly explain the different types of payment structures shareholders may come across when selling a business.

We’ll start with the most secure form of consideration, Day 1 cash, and then work our way through the other options. As the risk increases, so does the potential for greater reward.

DAY 1 CASH: WHY CASH ISN’T ALWAYS KING

As the saying goes, "a bird in the hand is worth two in the bush." Day 1 cash is the most secure form of consideration and is paid upon completion of the sale. Day 1 cash is liquid immediately, allowing you to begin your next venture, book that trip around the world, or invest with our wealth management team right away.

There can't be any downsides to cash, right?

The answer is not straightforward. While cash is the least risky form of consideration for the seller, it is the most risky for the buyer. This is particularly true when it comes to integration risks, as the exiting shareholders have reduced motivation for the ongoing success of the business. What does this mean? Often 100% Day 1 cash offers have a lower headline price because the buyer assumes the majority of the risk.

While some transactions offer 100% Day 1 cash, the reality is that most deals involve a mix, typically combining an upfront cash payment with one of the following consideration methods. 

DEFERRED CONSIDERATION: THE IOU OF M&A DEALS

Deferred consideration is a common feature in transactions where part of the purchase price is paid after completion, rather than all at once on Day 1. It allows buyers to spread the cost over time and can help bridge valuation gaps between buyer and seller. 

Once the buyer takes over the business, they also take control of the money it makes. The buyer’s risk is reduced because they can manage cash flow by using the acquired business’s profits to help cover the remaining purchase payments.

An example of this might involve 80% of the purchase price being paid at completion, with a further 10% paid after the next financial year-end, and the final 10% following the year after.

Although deferred consideration is not performance based, it does carry some credit risk. Remember when you lent your friend £20 and they never paid you back? Deferred consideration carries a similar risk (although you’ll have significantly more legal protection than a handshake at the pub). There is always a risk that the acquiring business could face liquidity problems or delay payments. 

Deferred payments can offer cash flow advantages for the buyer and help bridge valuation gaps. However, they also introduce credit and timing risks, which increase the level of uncertainty for the seller compared to receiving full payment on Day 1.

EARN-OUTS: WHY BUYERS WANT TO PAY MORE (YES, REALLY)

Selling a business involves different risks compared to selling other assets in your life. Many buyers structure offers based on the future performance or growth potential of your business, making the forecasts a critical foundation for their valuation.

While buyer diligence offers some protection around forecasted results, future performance can never be guaranteed. To mitigate this risk, buyers often use an earn-out mechanism, a structure that links part of the purchase price to the business meeting future performance targets. This creates a contingent element to the consideration, aligning payment with actual outcomes.

Imagine you’re selling your car for £20,000, but the buyer is unsure about its condition. They offer to pay £10,000 upfront, £5,000 when the car reaches 80,000 miles, and the final £5,000 at 100,000 miles. In this setup, the risk shifts to you, the seller. If the car doesn’t perform as expected, the buyer is protected from overpaying.

Earn-out structures come with added risks. No matter how confident you are in your forecasts, external factors beyond your control can still impact the business’s performance and affect the final payout. This might sound worse than it is in reality. Earn-outs are a common mechanism in transactions and are used to align the interests of the buyer and seller, encouraging a successful integration. 

What are the advantages over day 1 cash? Reducing the buyer's risk on growth projections provides them with the confidence to stretch the headline valuation. Buyers often say they want to pay the earn-out, which might sound counterintuitive at first. After all, why would they want to pay more? The reason is simple, paying the earn-out means the business has performed in line with expectations. If the earn-out isn’t paid, it usually reflects underperformance against the agreed targets, something neither party wants.

At Heligan, we work with you to minimise the risks associated with an earn-out structure. We ensure that performance targets are fair, clearly defined, and aligned with your goals. We also help define transparent methods for calculating these targets and implement protections that stop you being penalised for small misses.

EQUITY ROLL: ROLLING THE DICE

Remember those two birds in the bush? Well, now there are four or five.

In both private equity and trade deals, an equity roll involves reinvesting a portion of your sale proceeds into the acquiring entity, either a newly formed private equity-backed company “NewCo” or an existing trade buyer. 

In a NewCo structure, the private equity firm sets up a new holding company to acquire the business, and sellers roll part of their equity into this vehicle, becoming shareholders in the next phase of growth. Similarly, in a trade deal, rolled equity is exchanged for shares in the acquiring company. While equity rolls carry higher risk due to the lack of guaranteed returns or defined exit timelines, they also offer the potential for significant upside if the business performs well post-transaction.

Several factors need to be considered by sellers, primarily your appetite for risk and your desired timescales. In private businesses, rolled equity remains illiquid until a defined exit event occurs, most commonly through a future sale of the business, a recapitalisation, or, in some cases, an IPO.

One way to mitigate this liquidity risk is through put or call options, which can trigger a defined exit. A put option gives the seller the right to sell their rolled equity back to the buyer after a defined period, while a call option gives the buyer the right to repurchase the equity under agreed terms. These mechanisms can provide more certainty around exit timing and valuation.

So, why is an equity roll attractive to some sellers? In many cases, the acquiring entity is a private equity firm or strategic consolidator with a clear goal to accelerate growth. This creates an opportunity for you to retain a stake in the future of the business, keeping skin in the game and aligning interests with those of the buyer. It’s a chance to participate in the next phase of growth and potentially benefit from a second, and often more significant, liquidity event within three to five years.

Of course, this comes with risk, not all investments deliver as planned, and the value of rolled equity at exit could be lower than at the point of sale. But for those confident in the business’s trajectory, the upside can be compelling.

STRUCTURING THE DEAL THAT WORKS FOR YOU

Ultimately, the right deal structure depends on your personal objectives, whether that’s maximising value, managing risk, achieving a clean exit, or remaining involved in the next stage of growth. 

At Heligan, we take the time to understand what matters most to you, using a competitive, insight-led process to create alignment between your goals and those of the acquiring party. Of course, financial terms are only part of the picture. There are many non-financial considerations that can shape the right outcome, topics we’ll explore in future articles.