PPB August 2016

much the buyer is willing to pay

in cash at closing. It’s not realis-

tic for a seller to expect to receive

all cash at closing but neither is

it realistic for a buyer to think

they don’t have to deliver some

element of cash at closing.

Earn-Outs.

An earn-out

or deferred compensation

will likely be part of

most deal structures. The earn-

out is generally tied to gross

margin performance and will

therefore fluctuate as the margin

increases or decreases. If the

margin increases, so does the

seller’s payout. The reverse is true

if the margin declines. Earn-

outs are generally viewed by buy-

ers as a way to mitigate risk

while incentivizing sellers to

grow sales and maximize deal

value. The duration of an earn-

out can be as short as two years

or as long as five years with most

averaging three years.

Promissory Notes.

Although not common,

our firm has been

involved in transactions where

promissory notes from the buyer

were included as an element of

deal structure. Notes are fixed in

amount and typically replace the

earn-out portion of the deal.

They generally provide for some

level of interest although usually

at a nominal rate. Promissory

notes limit a seller’s risk in times

of declining sales and margins

but they also limit any upside

potential when times are good

and sales are on the rise.

The Balance Sheet

Effect

A company’s bal-

ance sheet will undoubt-

edly have an impact on deal

structure. Theoretically, if a seller

keeps the accounts receivable, a

buyer would expect to pay less

for the business than if they were

included in the deal. For that

reason, it’s important for owners

of the business to understand

what value exists on the balance

sheet. Cash and bank debt will

almost always be retained by the

seller regardless of how any

remaining balance sheet items

are treated.

Deal structure is an impor-

tant element of any transaction.

Careful consideration should be

given to its components in an

effort to maximize overall value

while minimizing risk and

adverse tax consequences.

COMPENSATION OR “DEAL

MONEY.

” Most owners who sell

their business will remain

involved with the company for a

period of time. In some cases,

involvement will be limited to a

short transition period, while in

others, especially where the

owner plays a key sales role,

involvement could last for years

into the future. In either case,

salary or commissions paid for

work performed for the buyer

post-closing should not be con-

fused with “deal money.” Salary

and/or commissions are in addi-

tion to value received for selling

the company. This is an impor-

tant distinction for the seller to

make in order to maximize value.

NEARING THE END.

One of the

final stages of selling your busi-

ness and completing the trans-

action involves the process of

due diligence. Due diligence is

nothing more than a period of

time where the buyer and seller

exchange information, some

confidential and proprietary in

nature, in an effort to learn

more about each other. Due

diligence goes both ways and it’s

important for both parties to

share. Buyers need knowledge

about the seller to ensure a

smooth and seamless transition

of ownership, which diminishes

the risk of a disruption to the

revenue stream and enhances

the likelihood of maximizing

deal value for the seller.

Likewise, the seller needs cer-

tain information about the

buyer, including financial infor-

mation, in order to formulate an

opinion on the ability of the

buyer to pay the obligations

associated with the purchase.

Selling your promotional

products company will probably

be one of the most important

transactions of your life, so be

prepared and plan accordingly.

Arm yourself with knowledge

about the value of your company

and think about what you want

to realize from the sale. Consider

retaining an experienced advisor

to effectively manage what can

be a complicated process. And

remember, realistic expectations

and flexibility are keys to maxi-

mizing value and “getting a good

deal.”

Look for the third and final article

in our acquisition preparedness

series in the September issue of

PPB

magazine.

MANAGE

MENT

AUGUST 2016 •

PPB

• 75

John Schimmoller, CPA

, is COO of Huntertown, Indiana-based Certified Marketing Consultants, Ltd., a PPAI business services member. He has

been active in the promotional products industry for more than 27 years. He and his two partners serve companies exclusively in the promo-

tional products industry with services including mergers and acquisitions, business valuations, strategic planning, business plans, marketing

plans and general consulting.

Deal structure is

an important ele-

ment of any

transaction.

Careful consider-

ation should be

given to its com-

ponents in an

effort to maxi-

mize overall

value while mini-

mizing risk and

adverse tax con-

sequences.