List of possible Deal Structures

July 19, 2022

by a searcher from Yale University - School of Management in Hamburg, Germany

Dear all,

I'm looking for a comprehensive list of possible deal structures that could help find creative, mutually acceptable terms for me and the seller.

Particularly with respect to risk sharing as the seller is much more bullish on his business than I am.

Thank you!!

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Reply by a searcher
in Washington, DC, USA

When exploring deal structures for purchasing a mobile home park, especially in scenarios where there is a difference in outlook between you and the seller, it's crucial to find creative terms that align both parties' interests. Here’s a comprehensive list of potential deal structures and strategies you can consider, focusing on risk-sharing: 1. **Seller Financing:** - **Full or Partial:** The seller provides a loan to cover part or all of the purchase price. This can align interests by allowing the seller to share in the future success of the business. - **Interest-Only Payments:** Initially, only interest payments are made, with a balloon payment at the end, giving you time to stabilize operations. 2. **Earn-Out Agreement:** - Payments to the seller are tied to the future performance of the mobile home park, such as a percentage of revenue or net income over a specified period. 3. **Profit-Sharing:** - Agree to share a portion of profits with the seller for a certain period, incentivizing them to assist in maintaining the park's performance. 4. **Equity Participation:** - Offer the seller a minority equity stake in the business, allowing them to benefit from future growth without directly managing the operations. 5. **Option to Buy:** - Structure the deal as a lease with an option to buy, giving you the ability to operate the park and assess its potential before committing to a full purchase. 6. **Deferred Purchase Price:** - Delay a portion of the purchase price until certain financial metrics are achieved, reducing upfront risk. 7. **Joint Venture:** - Partner with the seller in a joint venture where both parties contribute to and share in the business's success, potentially allowing you to buy out the seller's interest over time. 8. **Sliding Scale Payment:** - Create a payment schedule that adjusts based on the performance of the park, such as increasing payments as revenue or occupancy rises. 9. **Contingent Valuation:** - Agree on a purchase price that is contingent on a future valuation, based on the performance of the park over a specified period. 10. **Performance Guarantees:** - Include clauses where the seller guarantees certain performance metrics, with penalties or price adjustments if they are not met. 11. **Leaseback Arrangements:** - The seller leases back part of the property or operations, providing them with a continued role and income stream while you gain control. 12. **Management Agreement:** - Keep the seller involved through a management contract, where they continue to manage operations for a fee, ensuring a smooth transition and shared responsibility. 13. **Seller Retained Interest:** - Allow the seller to retain an interest in specific aspects of the business, such as development rights or future expansion opportunities. 14. **Consultancy Role:** - Offer the seller a consultancy role, ensuring their expertise is utilized while aligning their compensation with the park's success. 15. **Milestone Payments:** - Structure payments around achieving specific milestones, such as occupancy rates or profitability targets. Each of these structures can be customized to fit the specific needs and goals of both you and the seller. Open communication and a clear understanding of each party's objectives are essential to crafting a mutually beneficial agreement.

Reply by a lender
from University of Wisconsin in Minneapolis, MN, USA

Earnouts are the most common if the seller is thinking trends will continue and/or if they have a hand in future growth. Alternatively you could consider an employment agreement if they are going to continue to do sales. You do have to be careful on paying for what the business's current value is and not paying extra for the investment you put in post close. For example if the seller exits the business after the transition and is not key in driving future sales, yet you implement efficiencies or a sales team which drives EBITDA to increase, why should the seller share in that portion of the upside. Same if the seller retains a % of ownership. I think an earnout can be used very effectively, but also make sure your still paying for what the company is worth today.

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