Listen in as the team dives into best practices on understanding deal structures as part of an M&A transaction. From earn outs, to equity, to cash - we're covering all you need to know about deal structure.
Understanding Structure as part of an M&A Transaction
We're diving into a lot of different structures and what they mean:
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Mike Harvath 00:04
Hello and welcome to this week Shoot the Moon podcast broadcasting live and direct from revenue rocket world headquarters here in Bloomington, Minnesota, as you guys know, or maybe you don't, but if you tune in regularly revenue rocket is the world's premier growth strategy and m&a adviser to tech enabled services companies with me today and talking about m&a deal structures. Are my partner's Ryan Barnett and Matt Lockhart. Welcome guys. Great topic again, look forward to jumping in. Ryan, what's going on?
Ryan Barnett 00:39
Yeah. Hey, guys. Thanks, everyone, for listening here. The topic here today is really considering and evaluating some kind of structure as part of an m&a deal. When we look at structure, oftentimes, when you consider a deal, it's going to have some kind of enterprise value. And that enterprise value may be broken up into certain areas, something like let's say, a cash in earnout, or a seller note. So today, we're going to really kind of dig in into why firms should really consider the pros and cons to considering structure as part of an m&a deal. So, Mike, why don't you kick us off and further define structure a little bit, I gave a little preview there, but help help us understand what when we say alternative deal terms or structure may be considered Help Help Help a buyer or seller understand some of those terms.
Mike Harvath 01:41
Yeah, so I think we should, you know, certainly define all of the areas of, of currency transaction because there's price or enterprise value, which is one number, and then there's terms, right in terms come to, how are you going to pay for that deal, right, of course, there's cash, cash is king. And we'll talk about the merits of cash and a transaction here in a little bit. Earn outs or gain share. And that's typically when a seller will take some risks. Continue to have some risk, I think you have to remember as a, as a seller, in particular, you have all the risk and running your business today. And, and so when you sell your business, and an include substructure, you're certainly de risking. But it also gives you some upside potential. If you're the seller, to participate in, you know, future growth and earnings in the business. depending on you know, how you put that or noun or gain share arrangement together. There's often times seller financing seller financing consists of, you know, a seller giving a note and becoming a secured creditor, if you will, to a buyer. And, you know, that's very similar to bank financing, that usually comes at a premium interest rate, because the risk associated with the seller offering that loan to the buyer versus not, and there's equity, right? Oftentimes, buyers may use equity as a consideration. And as a seller, you can, you know, do what's called an equity role or equity rollover to participate in the upside of the combined entities in the future. And oftentimes, private equity firms use that as part of their sort of consideration. There's various ways to get to sort of funding a transaction that's sort of all separate podcasts in its own right. And I know we've talked about some of that in the past, but in general, those are the main areas of what we'll call consideration that would make up price I miss sneezing there, man.
Matt Lockhart 04:02
You know, it's it's the, you know, as you've often conveyed, Mike, creativity wins. And, and I think that as we talk about structure, it really, you know, comes down to creativity and, and the art of playing with the different levers that can create that win win situation for both the buyer and the seller.
Mike Harvath 04:32
Yeah, there is one more comment on currency that some people consider to be currency in a transaction or terms and that has to do with the compensation plan associated with a post acquisition or merger deal for the seller. If you're selling in and going to be around for a while, you know that employment agreement does have material value, and it should, in many ways be thought about as consideration Um, and you know, and outside of, of the value consideration associated with that employment contract. This isn't really paid by the buyer. But any working capital harvest should be taken into consideration if you're a seller as well, because it is your money after all, if you're a seller, and the only time you can actually harvest excess working capital provided you have that is during a sell side transaction. So, you know, that can be a material number, depending on your coverage ratio, sort of on your on your balance sheet. But you know, most people think about that as as a bit of a sweetener in a deal term. But is it should be mentioned here.
Ryan Barnett 05:48
And I think just as a note on that, I think when you consider structure here, those definitely components of that is when you talk about enterprise value, and let's say the enterprise value in this conversation, maybe 40 million, and in Would you consider harvesting that working capital and the compensation plans, would you consider that part of the enterprise value,
Mike Harvath 06:18
it's really not technically calculated in enterprise value. Because they're outside of EB, sometimes buyers will want to include that. But I would say for sure, the working capital harvest is excluded from that. Because in many ways, that is the sellers money already, they could have harvested, if there's excess working capital if they chose to without a transaction. So that's for sure exempted in the employment contract generally is also exempted, although there are very specific situations where a buyer may choose to load up an employment contract to be above market, sort of compensation for the role of the seller. And then it can be considered as part of value, if you will, in the transaction. And I don't want to get into too much of the weeds on that. But there are some very narrow and specific situations where that would make sense. And we've seen that used as a tool to you know, be creative and ultimately getting to, to a number that is important to the seller.
Ryan Barnett 07:33
Yeah, that helps relatively technical, but it certainly helps on to understand that. Matt, I'd like to really want to mentioned earlier that if you think about enterprise value, and you're going to meet a certain number, and I think we throw 40 million out there, it's interesting to see those levers that someone may pull to help you understand a little bit about, about those levers and see, if you adjust one, what happens to some of the others?
Mike Harvath 08:03
Um, yeah, and maybe we, we sort of bring it back to, you know, that that consistent topic that we that we tried to encourage people to think about, along the lines of selling in or selling out, right. And, you know, in the context of say, if there's a baseline, you know, the number that you're using $40 million, yet the seller is really, really focused on selling out and transitioning as quickly as possible, right? Well, you know, in that scenario, then they're very likely not going to, you know, want to utilize a, an earnout as part of that term structure because, you know, naturally so when there's an earnout in place, they want to feel in control of the ability to, you know, really attain, and maximize that earn out, and that doesn't go along with the idea of, of transitioning out quickly. Likewise, you know, may not be thinking about equity participation moving forward. And so they're really going to want to maximize that cash at close, if not 100%, you know, something in and certainly the 90s and percentile. And you know, as such, they may be foregoing some opportunity to increase that enterprise value. On the flip side of the coin, when looking for an opportunity to sell in and grow with a new partner, then you know, there's an opportunity to really increase enterprise value by utilizing an urn out as a means for additional value by utilizing the opportunity for an equity roll to get that, quote unquote second bite at the apple. And, and quite honestly, both of those in our experience and, and when we're involved in, it really does have an opportunity to increase enterprise value by, in some cases as much as 20% 25%. If there's, if there's a real gain in that, and in that equity opportunity, another means of increasing value is by committing to a seller note, you know, because, you know, the buyers are looking for as much as are looking for cash flows, to, to pay for some of that, you know, that value and a seller note and, and naturally, so, the seller can can gain further, you know, I think it at it at sort of a baseline level, it's, it's a bit of that risk reward. consideration, you know, when, when the seller is risking more by accepting, you know, more of that structure? Well, if they feel good about the progress of their business, and yet most all of our clients, do, they really do have an opportunity to increase that that overall value obtained in the long run through a transaction.
Ryan Barnett 11:56
Great, great, great summary, Matt, I think very well, very well done. Mike, when you turn this over to you here, and let's start to dig into the type. So we've mentioned cash kind of earn out or gain, share, seller financing, and equity. Those are four common common structures that we've seen in deals. Mike, can you walk us through an earn-out and in why someone would use an urn out and the date? Let's let's start there, and we can dig into to more on the risks and benefits of an urn out?
Mike Harvath 12:35
Yeah, certainly. I mean, I'll start with, you know, answering the question a little bit in a roundabout way. You know, the least expensive way to buy affirm is for all cash, right. So your, your, if you really believe in the deal, and you're looking for synergies, and one plus one equals three, four, or five, and I would add the copy, if you have access to cash, either based on having some on your balance sheet, or through some sort of debt vehicle that can have an appropriate amortization, that would pay that seller all cash, your, you're certainly going to get the most leverage to price point. Now with that said, there are very specific reasons to use an urn out. And some of those include not only to get aligned interest, which is the primary reason to have someone pay attention, if especially if the seller is selling in. And they want to get an more optimized value. So typically, when you use an earn-out, there's a higher enterprise value that gets paid if that earn-out is achieved. Because there's more risk being taken by the seller. And the only reason they would do that, of course, is for the promise of the additional upside in purchase price or higher purchase price. And, you know, the devils in the details and how those are structured, I think, you know, it's my opinion that earnouts really need to be structured to Win Win, win lose. Some buyers think about structuring or now to win lose, they want to set up their seller to not make it so they can save that money. You know, we think that's a big ethics problem. And you should really as the seller evaluate, you know, if that type of deal even makes sense for that buyer makes sense, because it may be an indication that that buyer isnt terribly ethical, at the same time it may not be on purpose. And the reason I say that is there takes some specific skill structure and earnout that achieves both sides the buyer and sellers objectives in becomes one that will likely get paid out Now, interestingly enough, you know, broad statistics in the m&a world say that earn-outs get paid out at or above their index value about 86% of the time. Most sellers think earnouts will not get paid out, we've all heard stories about our seller, certain sellers have not made their earn out, the primary reason that happens is because they weren't structured properly. And they were not aligned with aligned interest. They were done in a way that either was able to be manipulated after the fact or by a buyer, or they were just have poor structure. So if an earn-out or or a, what I call sort of a aligned interest, gainsharing type program is structured properly, then there's a very high likelihood that if you work well with your buyer, and everything's good post transaction, that you will achieve that earn out and it does ultimately achieve the goal of aligned interest. So, you know, we think earnouts, I mean, we earn outs are often part of a transaction, that's a more often than not, and you shouldn't, as a seller, be afraid of them. And at the same time, as a buyer, you want to be working with an advisor who can help you make sure that you've thought through all aspects of, you know, what, what is the proper structure, so that ultimately, everybody turns into a win win versus a win lose deal.
Ryan Barnett 16:28
Matt, any, would you like to dig anything more on on our notes, a little bit on on that structure there? Mike and mentioned, kind of a non fungible number, or things that are can't be manipulated, what have you seen in some deal terms that can help further define that?
Mike Harvath 16:49
Yeah, and sort of building upon Mike's point that, you know, a seller will want the opportunity, excuse me, a buyer will want the opportunity to make the appropriate changes within the organization, be it in animal integration, you know, be it to, you know, speed up growth through some additional spend, and etc, etc. So, it's especially within an IT services organization, that is dynamic, you know, really pegging that earn out towards a level of growth, top line growth, right. So, you know, top line revenue attainment, we think is, is a really good target, and because, you know, in, in a in IT services, and that can also include, you know, product plus services, being able to obtain that top line revenue means that you are also being consistent, you know, with your rate structure, you're, you're not really decreasing rates as just a means of obtaining new business. So you're able to, you know, maintain your gross margin, which is, you know, obviously critical in services, it also means that as you are growing, you are increasing your capacity. You're increasing your, your delivery team, appropriately. So, I think that is really top line revenue. Now, you know, sellers, or, excuse me, buyers may want to make it more complicated, you know, X percentage of client retention, X percentage of employee retention, yeah, no. And, and, you know, again, going back to, you know, try to sort of keep it simple, stupid. Well, in order to maintain the hat, you know, top line revenue and, and grow, it will naturally you're going to have to keep those clients you're going to have to keep those people and, and so it's really just the easiest means for all parties to get around. And, and really celebrate together because, you know, everybody wants to see that. The continued, you know, growing business.
Ryan Barnett 19:38
Good. Great points, man. I think oftentimes, we've seen some enterprise deals out there enterprise valuations that are, maybe they might be twice as much as a another offer, but the structure is so heavily based on an earnout and that earnout is so aggressive that if there are not met, there's such a discount Up to the actual thing. So I think they're there do have to be careful when you're concerned as a seller to consider, are the goals attainable? Can they can they? Can we be there successfully? Do I have an opportunity to upsell and cross sell? Do I have the ability to keep my team to go to go after that? From a buyer's perspective, this is a good good risk mitigation on if you're not hitting certain goals, you're protecting some of the cash that goes into that. So Mike, maybe you can help us understand collars or some kind of risk mitigation environment used, with an earn out, that helps helps the deal?
Mike Harvath 20:41
Yeah, for sure. You know, I think sometimes, there's ways to structure Well, that's sometimes there's ways to structure earnouts, with these sort of collars or ditches align, you know, you can cut it in at 80% of the target and cap it at 120% of the target. That gives, you know, both buyers and sellers some comfort that they're going to make, some are not because it's very hard to predict an earnout target exactly to the number, right. And, you know, sometimes earnouts get a bad rap, because there's a cliff that says, Hey, you don't get to a certain number, you get zero. And if you get past that number, you get no more and all that, you know, I think a better way to do it is to sort of create a broader target, that allows the there to be less precision in hitting the number in an earnout. As long as you're kind of broadly within this, you know, 40% range, you know, up or down on the target by 20, you're gonna get an urn out. And, and that's a much more fair way to come to a conclusion. And certainly, there's lots of ways to structure that, you know, you can add incentives for over performance, and some discounts are under performance. And, you know, there's a bunch of different levers to pull there. But it does help you sort of, you know, get to a place where you can have a much higher level of confidence that you're gonna make her earn out or get to a very close number, pursue pursuant to your to your forecasts, because those are intimately linked. And you have to know there's certain things that you're just not going to know, I mean, economic conditions could change, you could have a much more positive environment, you could get a lot of synergies with your buyer. If you're a seller, that could mean you could blow the number out, right. Likewise, you could run into some economic headwinds or whatever. So I think being more thoughtful and mindful of walking a mile in the other person's shoes on these deals, and structuring earnouts certainly will help you strike a balance that is more fair, and one that ensures that everyone's you know, does have aligned interests, and that's focused on, you know, achieving, achieving the numbers moving forward, which, in the end, is really a main reason for having an earnout. Um, you know, I'd be remiss in not mentioning that, you know, another reason to have an urn out is that you're certainly punting a little bit of when the timing of when a particular payment of that enterprise value will be made. So there is a bit of a financing component that's associated with that. That is important in calculating your total rate of return, if you're a buyer, and knowing that just like a seller note, you know, these are also financing vehicles, they're not just simply about aligned interest. And that if you think about cash flow and in supported cash flow from an acquisition as a buyer, you know, some of these things that do delay those payments a little bit pursuant to offering a solid some upside. There's some winwin there that should certainly be taken into consideration as well.
Ryan Barnett 24:15
Great, did that helps transitioning a little bit? Because we've got a couple of topics here but if we look at seller financing, what are some benefits and and drawbacks to seller financing and seller notes in touch? Mata I could turn over to you or Mike either way.
Mike Harvath 24:38
Yeah, I'll jump in Mike you can kind of round it out. Well, so you know, what is the basic of seller financing right. So the the seller is is giving the no right to the buyer to extend, you know, a loan right, as part of the overall consent ERATION oftentimes, that financing could be from a timeframe in line with the the earn out period could extend even longer. You know, what is the benefit to the buyer? Well, they they need to put less cash upfront, they can use the cash flows of the business as a means to pay off the the, the the overall consideration. You know, and yeah, that can be of real benefit to a buyer, so that they don't need to, you know, come up with as much cash. And, you know, for the seller, it's an, again, a means of increasing overall value. And in all cases, a seller note should come with interest. And so you're earning interest, you're becoming a bank, if you will, banks usually do pretty good when they when they're healthy with deposit. And, and, and and, you know, the longer that that, you know, find the FCM period is in place, the more interest gamed and, and again, yes to a real opportunity to again, increase overall value. Now, obviously, seller is going to want to be comfortable with the health of the buyers, you know, business and, and the health of their own business so that the cash flows can continue to pay down that that seller note. And yeah, we've never seen that and correct me if I'm wrong, but we never, at least in my experience, seen a situation where settler note is defaulted upon. And yeah, that's part of our job, obviously, as an advisor to ensure that, that that is going to be a good investment, if you will, Mike, what I miss? Yeah, you know, I don't think anything I think, you know, seller notes, I think there's only one caveat for sellers and seller notes is that, depending on how the buyer may be structuring financing with their bank, in addition to a seller note, you may need to understand whether your note would be put on full standby for repayment pursuant to a relationship with a bank. So sometimes this is a requirement. And I add a caveat that it's only sometimes when a buyer uses SBA financing, it's sometimes a requirement that the SBA actually not the bank, what's on the deal for repayment of the seller note to be on what's called full standby until the SBA note is either paid down or is paid off. And it means you won't be getting payments until that occurs. And so, you know, as a seller, you want to confirm what you're, you know, the frequency and the timing and sort of the interest accrual will be On that seller note as you would you know, any prudent business decision, understanding that all of that, you know, you want to understand the perspective of the rest of the financing package that a buyer may be needing to get or will be getting in support of your transaction. So that you're not at the mercy to be on quote unquote, full standby for repayment, if that's not what you've agreed to. Now, maybe that is what you've agreed to, and it won't be an issue because you'll be accruing interest over a period of maybe months or years. And those payments will start a year from now or two years from now. And you're good with that, because you're accruing interest. But you just need to go kind of in eyes wide open on that. To understand the full nature of the buyers financing package and how you are in that you should also know that from a recovery perspective, even if you're not on standby from a note repayment. It is very unlikely that in the hierarchy of debtors and a deal that you will be ahead of the bank, if a bank is involved, they'll be first in line to get repaid. Generally they'll have the biggest loan and a transaction and a buyout. And you're just going to have to accept that if you're going to offer a seller note. You know, to your point, we can't think of a situation where one hasn't been paid back usually, these buyers are very, you know, reputable business people and if they were going to make a commitment to you, pursuant to a seller note, they're going to honor it. And I think as a seller, I was going to provide a seller note you do want to make sure that you have an appropriate risk premia from an interest perspective on your notes to be you know, aligned with market Today, those risks are those risk premiums are probably in the, you know, 8,6,7,8, 9% range, in some cases, generally more than an interest payment of bank by a couple percentage points. And it's just you know how it is. So you don't want to leave money on the table there either. And you want to make sure that you're, you're being paid accordingly for the risk you're taking associated with a note.
Ryan Barnett 30:28
One quick question, here are seller notes used as a, a ihren out provision or is or can seller notes be tied to hitting certain thresholds?
Mike Harvath 30:41
Now, they certainly can, Ryan, there can be conditions to the know, what we call conditional a note that certain performance criteria have to be hit. In that case for kind of a hybrid right situation between an urn out and a note. And, and based again, and not to keep coming back to SBA programs. But some SBA programs don't really allow an urn out or they require a note. And so those notes have to be structured in such a way that they do have some performance criterias in there to protect the SBA sees is a way to protect the buyer from, you know, making sure they have cash flow associated with paying the note. So it's not in the farrier thing. It's just a additional risk mitigation play for both the banks as writing the loan as well as the SBA in that situation. Sounds good.
Ryan Barnett 31:44
And then transitioning to equity here. This is a kind of an equity roll. Let's start with just quick definition and and the pros and cons on that. Michael, give you the start. And, Matt, if you can round that out, that'd be a great.
Mike Harvath 31:59
Yeah, and I'm sure a Matt can have a lot of flavor here. He's been in the middle of negotiating Well, this week, as a matter of fact. So you know, equity. First of all, you should know that equity is very expensive currency. And probably the most expensive terms, if you will, of any of the things we've talked about loans or seller notes, or earnouts. Or even getting a loan for a cat that we'd use in a transaction, predominantly because of the candidate. If things go well, he can appreciate very, very quickly. And so you think about as a buyer, if you're going to give up some equity in your business, it's a great way to align interests, because you're going to now have a partner and owner of that business. And you're doing it pursuant to what oftentimes determine the industry is called a second bite of the apple where someone you know, you're going to sell in and you're going to be part of this thing for a while, whether that be as an investor or an operator or both. And you're going to expect that that broader entity is going to be sold or recapitalized at some point in the future. And usually that's within the next five years. Typically, all private equity firms operate. And it's a swap of a portion of your equity, for the equity in the new organization based on relative value units of the respective companies. And so there's acquisitions or mergers that often are cultivated through an equity swap, where you know, the larger firm in this case is valued in the smaller firm is valued, and then the relative value of that equity is swapped. It could be for part of the equity or all of the equity in a in a merger or an acquisition. And the seller becomes an an equity holder or owner in the buyers business. And so I think, you know, going into that you need to understand that the seller that you're going to have a new partner, likely it's going to be a situation where you're a minority partner, because you've taken some money off the table in the transaction. And, you know, maybe you have some are no longer aligned interest, still components that are in play, but you're not also a partner, you own equity in that new business. And as a buyer, you need to also understand that as long as you're managing partnerships, I would add that partnerships are our heart. So you want to make sure it doesn't matter what partnership it is you have to work at it. So it's important to make sure that you have again, I'm using this term a lot a lot in the interest in your partnership, going into one so that you can see the value of that equity over the short term and long term. and you will be an owner. So likely you'll get distributions or profit, you'll have responsibilities in the business at whatever level that equity is granted in the role. And you will also have if your salary minority shareholder rights and things like that. So you want to make sure that you have good legal and and m&a counsel when you're considering an equity role, so that you're in a good position to ultimately monetize that equity, consistent with your long term sort of exit strategy. That, that I miss anything or further thoughts on that?
Matt Lockhart 35:38
No, not
Mike Harvath 35:38
not in terms of the technicalities, I just want to, you know, I think it's a real, it's a real opportunity. And I think that sometimes sellers don't recognize the the opportunity that they have, with regards to the second bite at the apple. Now, clearly, to your point, like they, they got to feel really good about the partnership, and they got to invest in themselves in the partnership. And that can, sometimes that can be hard for a seller, because they've, they've sort of been sailing their own ship, if you will, like you're a former sailor, you know, what it's like to sail your own ship versus, you know, being on a, on a bigger ship with, you know, a team of people and, and, and that's, that's different, but there's a real upside opportunity, and, and, especially if it's a, maybe a smaller selling organization, and they've got an opportunity to join a larger, more established organization, and work with that organization and really learn from that organization. So there can not just be a benefit financially, but there can be a benefit professionally, and personally, you know, I often, you know, sort of talk to some of our clients and say, you know, it's oftentimes not a bad idea to align with really smart people, and who've been very successful in growing businesses and creating value, so just accentuating that as a as a real possibility. Yeah, and also, I would also add, you know, private equity, you know, also affords some very interesting options that, you know, you may not have as an entrepreneur, or a small partnership, or solopreneur, in the sense that you're owning all of the business. And that's really capital access to capital. So, you know, part of why private equity funded either platforms or add ons are interesting is because, you know, there's some financial engineering that that gets done by those private equity partners, and in partnership with a with a business that's operating in the IT services or tech enabled services space that are afforded to you as an equity owner that you may not have otherwise, and the opportunity to really grow a material business and add the enhance the value of that equity and influence it without as maybe as many constraints to access to capital, as you had before. It's certainly a material consideration. And one that, you know, I would take seriously, there's just so many great private equity firms out there that are doing really interesting things that you know, it's worth, it's worth paying attention, I think when, you know, someone calls and says, Hey, we're representing a buyer. And, you know, either they're a private equity firm, or they're a firm that is sponsored, if you will, by private equity, if they have the right sponsor, and the right strategy for that can really be a great, great opportunity for you to roll in equity and get a material second bite at the apple.
Ryan Barnett 39:16
If I was to round this out, I just we started with it. And I'll end with this is just cash it, you know, if it's an all cash, all cash transaction we've mentioned earlier, it's likely the lowest price for buying a business but perhaps the biggest risk, like just wanted to give us like the 30 second rundown or kind of pros and cons there.
Mike Harvath 39:43
Yeah, I mean, I don't know that it's as big a risk that people could fit right because you either as a buyer believe in the merits of the transaction. You've done your due diligence to determine that this business is a Healthy going concern that is as represented, maybe you've done a quality of earnings analysis to further that and certify the cash flows, you believe in the strategic imperative and the combination with the business that you're acquiring, and that the one plus one does really equal three. And if that's really the case, then the risk mitigation of a gain share or different structure for the trade off of paying more for that business doesn't make a lot of sense to me. Now, I do get that, you know, you have to have the cash to be able to pay the cash, right. But if it if it, if it's a buy low sort of sell high world, where you get the most leverage to buy, obtain all cash, and you believe in the transaction, fully believe in the transaction on the merits of the deal. And it's somewhat of a no brainer to to be a cash buyer, right. And you're going to be in a position to fully take advantage of the synergies as a buyer, for your own benefit versus share in the synergies and not, you know, be able to, you know, be able to be able to fully take advantage of increasing your internal rate of return as a buyer. And so I would, I would, I would encourage buyers to think hard about how do you how do you best afford an all cash deal and think about doing deals that way versus where many people go into into a deal thinking? Well, you know, I kind of believe in the deal, right? I really believe in the deal, but I want risk mitigation. Further risk mitigation. I think oftentimes, that's a, that's not the right thinking you should look at how do we capture the full amount of synergies moving forward, because if they exist in the business case, you might as well, you know, take all those chips off the table, and capture all the synergies. It's also in some ways better for a seller right sellers, like cash deals, they don't necessarily like to trade offs for a lower enterprise value, but some of them depending on their situation, may determine that's a reasonable and fair trade off based on where they are in their life. You know, maybe they're selling out, maybe they're, you know, wanting to do an orderly transition and move on. And for sellers, I think you also have to think long and hard about that, is it reasonable to trade off overall enterprise value, where you're likely to get a higher number, if you took some sort of earn out or gain share or whatever, or, or even a salary, where you're gonna get interest versus taking all cash. And I think everyone's situation is different, both as buyers and sellers, and it's important to thoroughly think through that, and not make assumptions about how it should be done or could be done. But to really think about those risk reward trade offs and the impact enterprise value on both sides, whether you're a buyer or seller, as you contemplate whether you should take or or give an all cash deal or whether there should be structure.
Ryan Barnett 43:44
That's great. We're got a great podcast here gone. Today, I'm going to give a quick summary of what I've heard. And then I'll turn it over to Matt. Anything else you want to cover but you know, I, I heard there's a there's a big correlation between higher enterprise value and the structures that you may have. So the more structure you may accept in a deal, it's likely that that structure may come with a higher enterprise value. And or an outsider that earnouts really need to be pulled focused on meeting really both your company growth goals and built on a non fungible and defined targets. So a revenue target that can be attainable, but still profitable for the for the buyer, and understand that some kind of call or maybe use so if you don't hit certain thresholds, you may not earn that earn out. But in reality, most earn outs are met and paid out and ultimately leading to higher enterprise values. fires in that case, you really think about the the timing of those payments to make sure that they're aligned with the return on investment that you've got. We talked a little bit about seller notes and they can be in a way considered guaranteed payments and the At the same time realize that the buyer may have different funding sources that need to be paid off before that seller note. Those seller notes could be tied to performance criteria in a note to protect buyers, especially if it's an SBA related deal to avoid a more structured or an out. And then we talked a bit about equity. And equity is such a strong tools for everyone to gain share together, and ultimately, perhaps the largest wealth creation tool within the the other different structures. And as a seller, you're able to participate in the benefits of that combined company. And as a buyer, you're truly aligned interests into the success of the business. And lastly, we talked about cash, you know, it's as a buyer, it's a really great way to show that you believe in the business, and that you're willing to stand behind your reason for for acquiring. And per seller may be a good time to understand that the cash in your pocket is is that risk mitigation of future worn outs is worth a little less enterprise value. So that's what we'll cover today. Matt, any closing thoughts?
Matt Lockhart 46:16
Well, first off, great summary, Ryan. Yeah, I'll go back to sort of where I started, which was, you know, creativity wins. And, and, you know, in order to be creative, to the benefit of both the buyer and the seller, I think it's it's absolutely critical to work with an advisor, who understands the business and understands the market, and understands the services so that that adviser can do a very good job of creating that structure, that it's not just about getting the deal done, but enables the path to future success. For for really both parties. And so it sort of harkens back to one of those key principles of work with an advisor that is rooted and has experienced and is focused on on your particular industry. So that's all I got, Mike, how do we close this thing out?
Mike Harvath 46:50
Thanks, guys. With that, we'll tie ribbon on it for this week, Shoot the Moon podcast. Thank you all for tuning in and look forward to next week, when we'll unpack more growth strategy and m&a topics for IT services firms worldwide. Thanks for tuning in and look forward to having you listen next week. Take care and make it a great day and week, so long!