How to structure an acquisition deal: the five structures that get deals done

This article is the written version of the video above. In it I walk through the simple ways to structure a business acquisition that I see working today, and how to raise the money for each one. It is for a first-time buyer, or a buyer who keeps finding good businesses and does not know how to pay for them.

I have advised buyers and sellers of small and mid-sized businesses since 2016, and the way deals get made has changed. Pricing is fairly steady. Banks are stricter. So the buyers who close are the ones who know how to structure an acquisition deal so that it works for the seller, the lender and themselves.

Sellers and banks want partners, not random buyers

The first thing to understand is who the seller wants on the other side of the table. "Sellers at this point don't just want random buyers. Same with brokers. They want people who are going to be their partners."

So put yourself in that position. What would a partner look like? What would he say, how would he act, how would he position himself? That is the person a seller trusts with the business, and the person a bank lends to.

Pricing is pretty steady right now, but you need to be creative to make deals work. Banks are stricter with everything financing-related, and especially with anyone who wants to finance 100% of the price. That means you need to know how to raise money from equity investors, not just from a lender. We open doors to investors and lenders we have worked with for the buyers we advise, so when the right deal comes they can close it instead of staring at a great deal and not knowing what to do.

Shop for loans where you are

Loans are different in every region, so learn what is available where you plan to buy. In the United States, an SBA loan is still a popular option for smaller deals. The SBA publishes the current rules for its 7(a) loan program. For bigger deals you move to conventional bank lending.

In Europe, banks are more careful, and private investors and boutique loan companies are good options. In Asia and Africa, you probably need to look at local partnerships, boutique banks and equity investors. Seller financing works everywhere.

The next step is to get focused. Are you in the US and buying in the US? In Canada, buying in Canada or across the border? In one state, or any state? You can do all of the above, but the narrower your target, the easier it is to line up the lenders and investors you need. Then ask for referrals from people already in that space.

Broker deals: simple structures, fast buyers

Working with a broker makes the front end easier. The broker found the deal, negotiated with the owner and collected the financials. You get to skip that work.

There are rules, though. Brokers want proof of funds: either you have the money, or you have people who will help you buy the business. We can be that introduction for the buyers we advise, and some brokers we introduce you to directly. We are an advisory firm, so the money itself comes from third-party lenders and investors.

Broker deals also mean more competition. "Brokers are not going to show the deal just to you. They're going to show it to more buyers." Less work on the front end, more work on the back end.

That is why broker deals are usually closed on a simple structure: a lot of cash up front, which comes from a loan, an equity investor, or both. "If you're serious with brokers, the most important thing is you need to know how to move fast and show that you're able and ready to close." Otherwise you waste their time and they stop taking your calls. Getting a buyer ready for that is one of the first things we do with a new client.

Off-market deals: where the creative structures live

Off-market deals are businesses that are not listed anywhere. You have to find them yourself, and finding them is a big part of what we do at Acquisitions.com. It takes time and it runs on relationships. But the best and most creative structures I have seen all came from off-market deals.

I have seen owners hand over a business for almost nothing because they liked the buyer. "The best way to get a business for free is to get the person to like you the most." For a lot of owners the business is their life's work. They want the staff and the brand looked after, and that can matter more than a higher offer from a stranger. If they see a younger version of themselves in you, you can build a relationship that no listed deal gives you.

Reaching those owners is work. We use LinkedIn, cold email, direct mail, cold calling and advertising to get in front of people who have not raised their hand yet. You become the first person who ever tried to buy their business. You get to teach them, hold their hand through the transition, and help them get the retirement they wanted. The structure can be flexible because you are giving them something they cannot get anywhere else.

The next three sections are the structures that come out of those conversations.

Structure 1: Seller financing, with interest

Seller financing means you pay the seller back over time instead of all at closing. On broker deals it is usually a slice of the price. On off-market deals, once there is trust, I have seen plenty of deals where the seller financed 100% of the price.

What makes it attractive to the seller is the interest. Say the business is $1,000,000. If the seller takes that as a note from you at 10% interest, you can ask them: where else would you put a million dollars and get that? Many sellers like the answer.

You can also give the seller a clawback. If you stop paying the note, they get the business back. That makes the seller comfortable, gives you a better deal, and means you need less capital up front. So you can buy a better business, faster.

Structure 2: The seller keeps a slice

Another option is to let the seller retain some equity. The seller keeps a small piece of the business, stays invested, and supports you after closing.

It also cuts your cash. Say the business is $1,000,000 and the seller keeps 20%. You now have $200,000 less to pay, which is $200,000 you do not have to raise or borrow. The seller gets a second payday later, when the business is worth more with you running it.

Structure 3: Earn-outs tied to results

An earn-out pays the seller based on how the business performs after the sale. Part of the price is only paid when the business reaches an agreed milestone, such as holding its revenue for a year or hitting a profit number.

Earn-outs work well on off-market deals because the seller trusts you to run the business properly. They also protect you: if the numbers the seller told you about do not show up, you do not pay for them.

The structures side by side

Most real deals mix two or three of these. A loan for most of the price, a seller note for part, and an earn-out for the part that depends on a result is a common shape. Our free roll-up calculator shows whether the cash flow covers the payments.

What has changed: sellers and brokers know more now

People like me talk about acquisitions a lot more than they used to. That has made it a normal thing to do, not an underground thing. It also means sellers and brokers see a lot of inexperienced buyers who waste their time.

So you need to be upfront, fast, clear and honest. "You need to have a clear plan to secure loans, to raise equity, and know how you're going to do the operations of the business post-acquisition." If it is you, say so. If it is an operating team or advisors, say that. Have it ready before the first call, because a broker who thinks you are not serious will stop showing you deals. The last thing you want is to be blacklisted from a broker network because you did not know how to present yourself.

Be willing to do flexible structures: earn-outs, seller financing, equity injections, deals with upside for the seller if you have real value to add. These are small adjustments, but they are what makes the market take you seriously.

Learning is not enough: act

You already know more after this article than most buyers who go to a broker. But learning alone does not close a deal. "You need to act fast, you need to adjust to the market, and you need to act with urgency, because life is short."

If your goal is to own a business, or to connect buyers and sellers as an advisor, get on it. Get the right support and avoid the expensive mistakes. A mistake in acquisitions is not only the deal that went wrong. It is the great deal you never closed. If you want help finding the business and structuring the deal, book a call and we will look at your situation together. For the full buying process, start with how to buy a business.