Cashless merger / creative earnout structures

December 21, 2020

by a searcher from Dartmouth College - Tuck School of Business at Dartmouth in Milwaukee, WI, USA

Working with a business in an industry hit hard by Covid. The owner sees a roll up opportunity of distressed competitors. His business is in OK financial shape, but a cash outlay today is still a risky proposition. First, does anyone have ideas on creative earnout structures where he could buy and control the go-forward entity, but put little cash down today? Second, if I help him with this strategy and put minimal equity capital to work what are creative ways for me to earn a stake in the go-forward entity?

Reply by an intermediary
from Washington University in St. Louis in Chicago, IL, USA

Agree with others here, and Mike certainly has great expertise here - would take him up on his offer to connect. To create a structure where you can earn equity, you want to identify specific services that will bring meaningful (preferably quantifiable) value to the company, and then tie that to a reasonable value of the company - then it is a math and legal exercise to document. The negotiation is on the value of the services and the company. I have seen similar conversations start out strong when there is excitement to work together, but then falter if the benefit is "nice" to have, but doesn't generate real value (usually revenue).

Reply by a searcher
from George Washington University in Salt Lake City, UT, USA

I agree. The devil is in the details of the deal structure. A business valuation is real and perceived, what you bring to the table is equally real and perceived. One capacity to execute is not known. So your equity ultimately is based on what that perception is and should be structure on your present and future performance. Legal structure would most likely take all of that in to account.

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