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Structuring Compensation/Payout in private market deal


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Hi all,


I know there are several people on the board (some whom I've met personally) who are active in the private company market, be it in business valuation, as a passive/active investor or even their own operator. I was therefore wondering whether I could pick your brain(s) just a little bit.


We are looking at a private market transaction where results have been +/- 20% below the initial forecast, which results in a valuation discrepancy of +/- 750k. This was caused due to a lack of qualified personnel in the business (it's mainly project based) so despite a healthy backlog the results for the year were not there (existing personnel was 99% utilized).


For the buyer, the 20% lower EBITDA causes a significant penalisation in the company valuation (it's a typical LBO financial structure) and talks with the banks for acquisition financing etc will become slightly more difficult given the lower growth (fortunately, the forecasted results were not yet shared with them).


For the seller however, it's much more difficult to comprehend that his business has become +/- 750k less worth over the span of a couple of months, especially as he sees the backlog which looks as healthy as ever. It is clear that coming in with an offer that is just 750k below our previous one will not get his heart racing, as the business to him seem unchanged. We very much understand his point of view and are now looking and thinking about creative ways of how we can structure a payoff for the 750k in "value disappearance" that will create some kind of win/win scenario for both parties.


As is often the case in smaller private deals the preliminary offer already consisted of 1) owner reinvesting around 15% in equity (with a predetermined takeout in 3-5 years), + offering the company a vendor loan as additional financing and receive an earnout after x years given certain targets. These are probably the most often used but I was now wondering whether you guys have an idea of other creative/correct structure to solve this problem.




- Structure an additional earnout on gross profit/EBITDA/realisation of certain projects but cash flow wise this is not very desirable

- When taking out his equity, increase multiple paid determined by certain metrics (gross profit, EBITDA, ... ).

- Use performance units linked to certain metrics which vest year after metrics are obtained? ...

- Base compensation both on projects realized & maintaining the backlog?

- Make the vendor loan flexible such that if it's not paid back after x years, it will accrue significantly more interest?


Any thoughts would be greatly appreciated!!

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Apparently you have a personal problem (or at least think you do) when your EBITDA shrinks by 20% since the beginning of your negotiation for a purchase of this business. I think you need to structure the compensation to mitigate the problem.


It is easy to lose employees when a company restructures or ownerships changes. Any project based business is dependent on good people and competitors know who they are and can hire them away. Sounds to me like you should give performance units to the right people (not just the former owner) to adress the root cause.


Disclosure: No private equity experience and only limited management experience. but I know the employees perspective and changed my job due to ongoing restructruring at rhrncompay I worked for. I had no problem finding another job. Sometimes, it is easier to move on than to stay.



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