Seeking Deal Structure Advice for Manufacturing Deal in Canada

June 02, 2024

by a searcher from University of Windsor in Vancouver, BC, Canada

I am currently in pre-LOI negotiations with a broker for a manufacturing acquisition in Canada with an enterprise value of sub $2M. The seller is open to both an Asset and Share purchase but prefers a share structure. The market value of the company's assets is around $200K.

I would appreciate it if you could share your thoughts on the proposed deal structure, or suggest a new one, and offer negotiation strategies that have been effective for you in the past to get the seller to accept the LOI.

1- Asset Purchase: $2M purchase price including WIP, 15% VTB amortized over 3 years, 5% in escrow hold-back account for 18 month.

2- Share Purchase: $1.9M purchase price including WIP, 15% VTB amortized over 3 years, 5% in escrow hold-back account for 18 month.
Thanks!

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Reply by a searcher
in Vancouver, BC, Canada

You should definitely include the purchase price in the LOI, however, I would mention that the price is a function of the normalized EBITDA multiple. During diligence, if anything comes up that requires a reduction in the normalized EBITDA, then it's clear there will also be a reduction in the price. Or if there is a significant risk identified, you can reduce the multiple, which then makes it clear there will also be a reduction in the purchase price.

This will increase your leverage during diligence, while reducing the risk of damaging the relationship with the owner, which may derail the deal.

Also, how will working capital be handled? Apparently being vague in the LOI gives you leverage later on, but I would strongly caution against this because working capital disagreements are the primary reason that deals fall apart, or result in litigation after closing. IMO, it's best to be explicitly clear in the LOI about how working capital will be handled.

Lastly, other than financials, what's important to the owner? You can emphasize these non-financial items in the LOI to increase likelihood of acceptance.

Reply by a searcher
from Camosun College in Victoria, BC, Canada

The buyer is going to want a share purchase likely to claim the capital gains exemption and it is easier to crystalize the gain prior to June 25 to avoid additional capital gains tax. If you make it an asset purchase, the price you have to offer will likely be substantially higher than $2,000,000 to equalize the after-tax proceeds. A share sale would likely save them at least $200,000 in tax and gives them added flexibility in crystalizing the gain on the shares to avoid the increase capital gains rates on June 25, 2024. The $100,000 in additional proceeds for an asset sale is not enough for the seller to want to accept an asset deal. I would focus on making a share sale work assuming the valuation is reasonable to you.

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