Deal structure to align buyer and seller betting on recovery?

September 28, 2020

by a searcher from Full Sail University in Milwaukee, WI, USA

If a seller tells me that covid is just a blip for them—"Next year will be a banner year!" how do I best structure seller financing to communicate "Great! I'll believe it with you if you put your money where your mouth is. Let's do this together..."

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Reply by a searcher
from Columbia University in Jacksonville, FL, USA

This is an excellent question. I am in the hospitality industry and was about to close on 5 restaurants pre-COVID and pulled out as it in early March and saved myself millions, literally, as much of the debt would have been personally guaranteed. I agree with the two previous recommendations in that 2019 EBITDA and Revenue milestones need to be achieved but also think that this should be dragged out for a longer period than recommended. Imagine a scenario where we have a quarter or two that achieves 2019's numbers and we have a second wave of the pandemic. Also, there are genuine regime changes in some industries: restaurants, hotels, office buildings which can't be quantified by these models.

Reply by a searcher
from Northwestern University in Los Gatos, CA, USA

I've been doing commission/royalty arrangements to make it simple and inexpensive to administer. There's lots of ways to set this up while maintaining simplicity. I like to do it by account when that's primarily what we're buying. A broader 'recovery' alignment around revenue might require a more generalized definition.

If I were a seller I'd be very cautious and skeptical about creating the opportunity and potential for an operator to make choices that reduce how much s/he owes me on a note (e.g. EBITDA or worse, Adjusted EBITDA). There's just so much that can be rigged with accounting machinations that then require both parties paying people to fight over the money.

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