In previous Deal Notes® (39 and 167), we touched on forms of non-cash consideration such as earnouts and seller notes. Buyers increasingly ask sellers to “roll equity,” or, in layman’s terms, accept part of their payout as non-cash consideration, such as equity in the new organization. While this may not be as risky as ‘rolling the dice,’ the risks and rewards might be similar. Today we are discussing taking non-cash consideration in the form of equity.
This is a fantastic option for sellers who remain interested in the upside of the company but may want to take some chips off the table. For buyers, this can often lower the amount of capital needed to purchase the business upfront and ensure the seller is engaged in the future entity, lowering risk altogether. Once the deal closes, that retained slice lives inside a new company with new owners and new priorities.
The most common misunderstanding is control. After closing, sellers typically don’t control the timing of the next sale, decisions about reinvestment, or whether new owners come in. Sellers will lose control of the new entity. Another overlooked piece is how the payout works at the eventual exit. It is important for sellers to understand they are investing in the future of their company at the valuation of the transaction. So, in order to make a return, they must view their company as having significant upside potential, allowing them to partake in it.
As shown in one of our recent surveys, 28% of transactions had a component of non-cash consideration equal to up to 25% of the value, and 12% of transactions were greater than 25% non-cash consideration. Accordingly, nearly 40% of transactions had some level of non-cash consideration, proving that it is often an attractive structure for many sellers and buyers.
Non-cash consideration can be a real wealth-builder — but only when sellers appreciate the risks and rewards and apply them intelligently to their own situation and goals.
Have a great day,
Max McFarland
Associate
