Creative deal structuring is the way that a company structures things financially. When someone is buying or selling a business, there are no official rules that must be followed, apart from what is legal.
When structuring a deal – outside of legal agreements that must be signed- you have a lot of flexibility as long as terms are agreed upon by both parties.
Beyond the legalities, you can do things in a very flexible matter, including capital structures.
A capital structure is the financial structure of capital (money) that a business possesses.
If you are building a house, the foundational structure will be different if you are building a 2-story house vs. a 50-story building. The same is true with business. The levels of debt and equity that a business has are part of the capital structure and every business can support different structures.
If you were manufacturing airplanes, you would need large sums of capital to make planes, but once you sold them you’d have a large influx of capital from the buyer at the time of the sale. You could get the buyer to give you a deposit upfront and make milestone payments. Or a bank could issue a line of credit to you, and you could borrow the amount that you need to make the planes, then when you sold the planes you would pay off the amount that you’ve borrowed along the way.
If you’re building a 50-story building that takes many years to complete, then you’d need to figure in some time to sell or rent out the units. You might get a 5 year loan so you’d have some time to repay it.
These are two simple examples of the structures of debts. There are many more types, but my point is that different businesses can support different capital structures.
As it relates to equity investments there are lots of types of structures.
“Business deals and structures are flexible. You can be creative and allow for what works for you, your business, and the investment to actually happen.”
There are so many possibilities. You could:
- Sell company, but keep a part
- Sell business and be willing to take payments over time
- Act as a lender to the buyer (seller financed)
- Buy a business but borrow most of the cash
- Have a seller lend you the money
- Buy a business, but include a clause that seller has to take it back if certain milestones aren’t met
“You need both parties to agree on the terms to make it work, but creativity is allowed in deal structuring.“
Creativity in Structuring
Just because you haven’t heard of a particular structure doesn’t mean that you can’t create something to suit your business in the future. Also, just because you read about a sale in the news, don’t assume it followed a rule book. You have no idea what fully went on unless it is fully disclosed to you.
A real world example of creativity in funding:
In 2015 a well known investment business was sold for $1.35 billion to another investment management firm. On the surface it looked like the buyer was paying a huge premium, but they got very creative with their financing. They obtained a real estate loan for the underlying real estate properties that this business owned. Even though this company wasn’t a real estate firm, they had real estate assets. So this did a couple of things:
- Allowed the buyers to pay less in cash. If they had taken out a business loan, they would have had to write a bigger equity check.
- It allowed the business to pay less in interest expense because the real estate loans had a lower interest rate than a business loan.
They then turned around and sold the company for $2.9 billion to another firm, while retaining 35% of it. Now they’ve doubled the value, got a handsome return, and managed to retain 35% of the business, so if it grows they still have a stake in it.
What’s the takeaway for you? How can this impact you and your business? If you’re trying to grow your business, know there is financial creativity and flexibility that you can tailor to work best for you, as long as the other party agrees.
Stay tuned for upcoming episodes where I’ll go into more detail about understanding how both parties need to structure a deal.
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