Buy & build strategies — deal & payment structures explained

Growing a business through acquisition can be a successful strategy for growth — helping to gain new customers, skills and technology, enter new markets or create valuable synergies.

However, it can also prove expensive and time consuming to negotiate and close deals. Frequent obstacles arise during early negotiations and it’s important to ensure that any acquisition is approached with strategic planning when considering the deal structure and negotiating the deal terms.

Here, Mairead Platt breaks down the options available to acquisitive businesses that are exploring new targets, including the different deal and payment structures available.

Acquisition structures

In the dynamic world of mergers and acquisitions, businesses pursuing a buy and build strategy must carefully consider the most appropriate deal structure to ensure successful growth. When a suitable target business has been identified, there are a number of factors to consider when agreeing the deal structure.

The most common structure is via a share acquisition, whereby the acquiring business purchases the shares of the target company as a subsidiary of its own group — effectively acquiring the entire business, including its assets and liabilities. This structure is often simpler and quicker to execute, as it involves a single transaction. However, the buyer assumes all the existing liabilities of the target company, which can pose risks if thorough due diligence isn’t conducted.

In some circumstances, an asset purchase may be favoured, especially if there are unwanted liabilities or risks identified during the due diligence process or the acquirer only wants a particular division of the target business. Under an asset purchase, the buyer will only purchase specific assets and liabilities of the target company — allowing the buyer to cherry-pick desirable assets while avoiding unwanted liabilities. It also provides flexibility in structuring the deal but can be more complex and time-consuming due to the need to transfer individual assets.

Payment structures

There are also different approaches to structuring the deal terms and the purchase price. Two common ones are for the buyer to offer cash in full on completion or pay part of the purchase price upfront and the rest on deferred terms.

Several factors can influence the negotiation of the deal terms, including the buyer’s source of funds and existing resources as well as whether they have sufficient funds available upfront. It’s becoming increasingly rare for the entire purchase price to be paid upfront on completion — instead, part of the purchase price is usually deferred to a later date. This may simply allow the buyer time to gather the necessary funds but can also provide a reserve for any claims against the sellers by way of retention.

Retaining part of the purchase price would normally be negotiated by the buyer if, during the due diligence process, high risk issues have been identified that impact the value or viability of the acquisition. A retention can offer assurance to the buyer to cover any potential liabilities or contingencies.

Deferring payment will also apply if an earn-out has been agreed. Earn-outs are a popular mechanism used to address valuation differences and incentivise the sellers to achieve specific performance targets post-acquisition. Under an earn-out arrangement, a portion of the purchase price is contingent on the target company meeting predefined financial or operational goals within a specified period. This structure aligns the interests of the buyer and seller, as the seller has a vested interest in the continued success of the business. However, earn-outs can be complex to structure and administer, and disputes may arise if the performance targets aren’t clearly defined or achievable.

In some acquisitions, the buyer may offer non-cash consideration in the form of equity by offering consideration shares as part of the purchase price. Equity in the buyer or a retention of shares in the target business allows the sellers to continue to receive part of the profits of the business — and this structure can align the interests of both parties, providing the sellers with potential upside in the future growth of the business. However, it also introduces complexities related to valuation, dilution, governance and the ongoing relationship between the sellers and the buyer, which will need to be regulated through a shareholders’ agreement.

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Our corporate transaction lawyers are experts in mergers and acquisitions. We provide support on the acquisition trail as you grow your business. We advise many serial acquirers on all sizes of transaction and understand the complexities of corporate deals.

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