Mergers and Acquisitions For Dummies by Bill Snow

million in stock in the acquiring company
    Up to $2 million in an earn-out, with the amount actually received based on acquired company achieving certain results
    This setup is just one example of virtually limitless permutations of structuring a deal.
    Consideration is limited only by your imagination, which is why creativity is so important during the deal-making process. I’m a firm believer that Buyer and Seller can almost always find a mutually beneficial transaction. Think of it as turning knobs on a stereo: You have a virtually infinite number of ways to twist a multitude of knobs. The following sections lay out a few such options.
    Buyers, don’t provide Sellers with your financials, even if they ask. Instead, offer some sort of proof of your ability to complete a transaction. A letter from Buyer’s senior leader expressing support for Buyer’s acquisition strategy goes a long way on this front.
    Buyer uses his own cash
    The most obvious source of capital is for Buyer to use his own money. The benefits are obvious: a Buyer using his own money has total control over the situation. A third-party lender usually institutes hoops for the Buyer to jump through; using his own money removes those external limitations.
    The downside is that money isn’t a bottomless pit, and a company putting money into an illiquid asset such as an acquisition ties up that capital such that the money can’t go toward other important expenses such as payroll and other operating expenses.
    Using his own capital to finance 100 percent of an acquisition also means the Buyer is assuming 100 percent of the risk. Bringing in outside capital helps Buyer spread the risk.
    Many Sellers incorrectly assume that Buyers are using their own money, and worse, that Buyers have an endless stream of money they’re willing and happy to throw around with little or no planning. Mentally spending someone else’s money like this is one of the biggest errors anyone can make. Being carefree with someone else’s wallet is easy, but think about how you’d feel if someone told you, “You have money; just pay more.”
    Buyer borrows money
    Because using up precious cash and assuming 100 percent of the risk of an acquired company often makes little sense for Buyers, many Buyers borrow money to help finance the transactions. Borrowed money comes in three basic flavors: senior debt, subordinated debt, and lines of credit. See “Understanding the Levels of Debt” later in this chapter for more on how debt plays into a deal.
    Debt, or leverage, is a double-edged sword: It can help a company diversify its risk and make an acquisition easier to swallow. But the borrowing Buyer becomes beholden to the creditor and has to jump through hoops to obtain the capital and keep from defaulting on the loan down the road. If the Buyer’s business declines, he may not be able to the meet loan terms, and a Buyer who can’t repay the loan at that time may lose the business — the entire business, not just the acquired company.
    Sellers should keep in mind that Buyers may have limited ability to adjust price or conditions of the acquisition; the Buyer’s overlord, the lending source, has an enormous say in these transactions.
    Buyer utilizes Other People’s Money
    Although I warn against spending someone else’s money earlier in the chapter, getting other people to give you money to finance a deal is actually a good strategy. Securing Other People’s Money (as I like to call it) is easier said than done, of course; no Other People’s Money shops exist, so you have to be creative.
    Private equity (PE) firms can be a good source of Other People’s Money. A Buyer unable or unwilling to utilize bank sources of capital may be able to turn to a PE firm to help with the acquisition, although PE firms often exact a high price in return for using their money.
    A PE firm often wants a controlling interest in the