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Beyond the “sticker price”, duration of payments and structure of payout, the type of consideration is also a critical component in evaluating the overall deal structure in a transaction involving an advisory practice. Cash and equity in the buyer’s firm are by far the most common forms of consideration. Cash consideration is relatively straight forward, aside from the timing of payments (i.e. earnouts, installments, one-time, etc.). On the other hand, equity as a form of consideration can be far more complex.
Many sellers prefer an all cash deal. There are good reasons for this: it is measurable, consistent, and largely unambiguous from a tax perspective. Cash deals can be a great option for a seller who is leaving (or planning on leaving) the advisory business within a relatively short time span. However, sellers planning to remain at the acquiring firm should carefully consider the opportunity cost of a cash deal versus a deal that includes at least a portion of equity.
Some buyers offer equity in their firm as part of the consideration for the seller’s firm. Equity in the buyer’s firm presents the opportunity to capture additional upside post transaction (a second bite at the apple). Sellers who have longer time horizons and expect to remain working may be ideal candidates for equity.
There are several benefits to equity. For example, given that the acquired advisors will be active contributors to the firm’s profit and growth, equity can provide an opportunity to participate in this value creation. Equity can also be a way for sellers to maintain a voice in their new firm by joining as a partner. By extension, the culture of the seller’s firm may be better preserved.
Sellers should also be aware that it is not necessarily all upside. The management and growth of the firm are important things to understand to instill a sense of confidence that equity will appreciate over time. Liquidity is another risk sellers must understand, especially in a private company. It is prudent to consult an attorney and CPA when navigating equity issuances to fully understand the nuances and implications.
For more on Deal Structure see [refer to other blogs in the series]
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