Beyond the Headline: Where Sellers Lose Money After the Handshake
Mid-market M&A often hinges on a single deal. It doesn’t involve a full-time team to handle the sale of your startup, and there’s little room for minor mistakes without impacting the deal. After you’ve built your startup’s value, you want to make sure you don’t take steps or make errors that could cost you real money in the transaction details. Owners often fixate on the headline price that results in the handshake deal, yet they end up giving away money later on. The seller’s net profit is often notably lower than the headline as a result of a variety of factors, including the transaction structure and purchase price adjustments.
What should you know if you are offering your startup? Consider the following information from our startup lawyers.
Startup M&A
When a startup founder is ready to sell, they often use pegged pricing, a mechanism in which the final price is measured based on specific metrics at a later date or at closing. This is known as the “peg.” A peg is a baseline target the seller and buyer agree on. This is the target number. When the parties set a peg, they also agree on the financial or operational metrics that will determine the final price, such as revenue or working capital. Once the parties agree to the deal and it closes, the actual numbers will be determined based on the metric. The final adjustment can occur at closing, or it can happen after closing and in post-acquisition.
There are different types of pegs that are used, such as working capital pegs, earn-outs as pegs, and revenue pegs (the latter of which are common only in particular types of tech startups), according to SCORE.
Types of Pegs and Factors to Consider
Transaction structure is the biggest one: earn-outs, holdbacks, and other contingent payments can have an outsized effect on take-home consideration. With earn-outs as pegs, a portion of the purchase price will be tied to future revenue or product sales after the buyer acquires the startup. Buyers can try to game this to their advantage. Purchase price adjustments, such as working capital true-up, are another.
Discuss the specific metric being pegged and when the adjustment is to be calculated with a startup lawyer before a deal in order to prevent losing money after the handshake.
Protect Your Take-Home, Not Just the Headline
When you are offering your startup for sale, you don’t have to be among the many founders and sellers who end up losing a significant amount of money after the handshake. While there may be costs that you will have to factor in and ultimately subtract from the headline price, you can take steps to avoid losing money through the transaction structure, purchase price adjustments, and more. One of the startup attorneys at Triumph Law can speak with you today about any questions or concerns you have about mid-market M&A and how to handle the sale of your startup.
Source:
score.org/