The world of mergers and acquisitions looks a lot different than it did just two years ago. When credit was easily available to a buyer financing an acquisition, things were easier for sellers. Now, buyers are looking to sellers to take on more of the risk.
- Promissory notes. Many buyers are asking sellers to accept part (or even all) of the purchase price as a note. In other words, the seller gets less cash at closing and only receives payments under the note if the company is able to pay.
- Earn-outs. An earn-out is a mechanism where a seller receives part of the purchase price over time, depending on how well the business is performing. Usually, the buyer and seller will agree upon financial measurements that the company has to meet in order for the seller to receive any payment. Earn-outs can be very complicated and difficult to track and measure after the closing.
- Mezzanine financing. Because senior debt is not as readily available as it once was, buyers are turning to mezzanine lenders. Mezzanine capital is generally subordinated to any senior debt but has priority over common equity. Mezzanine financing generally has a higher interest rate than senior debt. That may cause the buyer to provide less generous financial terms to the seller.
- Equity rollovers. The buyer may ask the seller to roll over some of its equity into the new company. That is, rather than receiving the purchase price that would be attributable to all of the seller's interest in the company, it will receive only a portion of the full purchase price plus some equity interest in the new company. In an equity rollover, the seller continues to own a portion of the business and bears the risks related to that ownership.