How to address high valuations in deal structure

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May 16, 2022

by a searcher from University of Texas at Austin in Houston, TX, USA

What are creative ways to address higher multiples in deal structures that is when a seller expects a higher multiple than a buyer is willing to pay? This can include varying the percentage of seller financing, payments contingent on company growth metrics, payments contingent on client retention, etc. What are some common or unique contingencies that you've seen in deal structures?

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Reply by a searcher
from University of Calgary in Calgary, AB, Canada
Like Alex suggested, earnouts can work, but you must be careful on how they are structured. There are several ways to structure earnouts, with one of my favorites being a collared earnout. This involves having disincentives if a business underperforms post transaction (usually by way of claw back) and rewards if a business outperforms post transaction (percentage of profit over a hurdle). Another key is to ensure your definition of the hurdle (ie. EBITDA) used in the purchase agreement is the same definition that you used when valuing the business.
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Reply by a searcher
from INSEAD in Madrid, Spain
Apart from earnouts, another option could be to only by 51% or more, and leave a put/call option structure for the rest. A put for the minimum value, a call for the maximum, depending on certain KPIs being met. The difference is that in this case the seller remains with a seat on the board, good visibility and some control (need to specify in the shareholder agreements) and may be more comfortable. I would be curious to hear other people's views on this.
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