Deal Structure Suggestions
March 05, 2024
by a searcher from Pennsylvania State University in Harrisburg, PA, USA
Looking at a manufacturing/distribution business with a strong services component included. (For illustration purposes, think of a fence company that manufactured a unique type of fence but the service side of the business was general fencing installation.) There is an opportunity to acquire only the service component of the business while leaving the manufacturing and distribution with the seller as they have another complex manufacturing business in a different industry that could easily absorb this carved out product.
Currently, the target business is vertically integrated and is utilized by the services side of the business, albeit minimally. The branding and trade name are strong and I would like to continue the use of the name post-close given the rich history and brand awareness.
I am wondering if anyone has any good ideas on deal structure around carving out the manufacturing/distribution business while providing a way to acquire the service side of the business with the branding in tact. To be clear, we would utilize the manufactured products as needed going forward but would de-risk the acquisition and put the focus solely on the service business post-close.
Any creative thoughts around structure where the product manufacturing is carved out and I would buy only the service business and retain the current branding?
in Durban, South Africa
Here are a few "creative ideas" for structuring this deal:
1. Licensing Agreement for Brand Use
In light of the considerable value (due to its history and brand awareness) of the brand, you could negotiate a licensing agreement with the seller. This agreement would allow you to use the brand name, trademarks, and any related intellectual property exclusively for the service side of the business. The terms could include a fixed period with options to renew, and possibly include clauses about maintaining certain standards to protect the brand's reputation.
2. Supply Agreement for Manufactured Products
Since the service side of the business will still require the manufactured products, entering into a long-term supply agreement with the seller is crucial. This agreement should outline the terms of product supply, pricing, minimum and maximum purchase quantities, quality standards, and delivery timelines. To ensure competitive pricing and availability, the agreement might include "most-favored customer" clauses, price adjustment mechanisms based on market conditions, or options to source alternative products if necessary.
3. Earn-out Arrangements
To align interests and potentially ease the upfront purchase price, you could consider an earn-out arrangement. This would base part of the purchase price on the performance of the service business post-acquisition. This will ensure the seller remains invested in the success of the business, especially if the service component relies on the manufacturing side for product supply.
4. Joint Venture or Partnership for Specific Projects
If there are opportunities for innovative product development that could benefit both the service and manufacturing sides, consider forming a joint venture or partnership for those specific projects. This arrangement can leverage the strengths of both entities and provide a framework for collaboration on product innovation, marketing, and sales initiatives.
5. Option to Acquire Manufacturing in the Future
While your primary focus is on acquiring the service side of the business, consider negotiating an option to acquire the manufacturing/distribution component in the future. This option could be contingent on certain performance milestones or be available for a specified period. It gives you flexibility to fully integrate vertically if it becomes strategic to do so.
6. Transition Services Agreement
A Transition Services Agreement (TSA) can be crucial for ensuring a smooth handover, especially in areas where the service and manufacturing components are closely linked. The TSA can detail support services the seller will provide post-transaction, such as IT systems, employee training, and customer service, for a defined period to ensure continuity.
7. Performance-Based Sliding Scale Royalties
If part of the arrangement includes ongoing use of the manufacturing services, consider negotiating a royalty structure where payments for using the brand and products are tied to the performance of the service business. This could motivate both parties to support the business's growth.
8. Rights of First Refusal or First Offer
To protect your future interests, you might negotiate a right of first refusal or first offer on any future sale of the manufacturing/distribution business or other assets critical to your service operations. This gives you the opportunity to match any offers the seller might receive, ensuring you have control over essential components of your business model.
Just as a cautionary side note...
Each one of these suggestions involves complex negotiations and legal structuring; and require thorough due diligence; legal counsel and financial modeling -- but hopefully this helps you structure your thoughts on the matter.
Good luck, AJ!
from University of Notre Dame in New York, NY, USA