The structure of the transaction is usually already agreed by the parties in the Term Sheet (see M&A Basics: Do you want to sell your company? Part 1 - Term Sheet and NDA).
What are the options?
The structure of a transaction can have several layers. First and foremost is whether the investor is interested in buying the entire company or just part of it. If the investor is interested in having you continue to manage the company and participate in its further development, then they will likely offer you the option to remain in the company with a minority interest. In this case, the transaction negotiations will include not only the transfer itself, but also the rules of cooperation in the management of the company after the closing of the transaction.
The investor, as the majority shareholder, will want to exercise control over your management, but at the same time will want to leave you sufficient room to implement the approved business plan and further develop the company. To this end, investors very often tie part of the purchase price to the future performance of the company in their indicative offers (e.g. part of the purchase price is payable in three instalments tied to the EBITDA achieved in the 1st to 3rd year after the transaction). The sellers are thus incentivised to manage the company to the best of their ability in order to achieve the deferred portion of the purchase price themselves. However, this seemingly logical bullet-proof balance can be significantly upset, especially if the investor's and the sellers' ideas about the future development of the company start to diverge. In these situations, each party will want to rely on the provisions of the agreements that were negotiated as part of the transaction documentation.
The second layer of structuring the transaction is how the purchase price is financed. It is not uncommon for an investor to finance the purchase price not from its own resources but through an acquisition loan. On the face of it, this is not your problem, but if you are to remain in the target company (directly or indirectly) as a minority shareholder, you need to prepare for the transaction to get complicated. Instead of two parties, there will suddenly be three in the transaction, and each will want to protect its own interests. The bank will require an equity contribution in the first place, and if you are to remain a minority shareholder, it is possible that the investor will suggest that a portion of the purchase price be applied to your portion of the contribution. In addition, the bank will require sufficient security, in particular a pledge on the shares, a pledge on receivables and (in)movables, a guarantee of the target company, etc. All this must be anticipated and reconciled in the transaction documentation so that neither party is prejudiced by the chosen financing method.
The third layer of structuring the transaction, which is extremely important to you as the seller, determines how and when the purchase price will reach you and what the final amount will be. The first part of the purchase price is usually fixed or based on a debt-free cash-free adjustment (in this case, a portion of the price is adjusted after the financial data is available on the closing date). The first part of the purchase price is often paid by means of a cash-inclusive account, with the release conditions being precisely described in the transaction documentation. The second and other parts of the purchase price are usually linked mainly to an additional adjustment (see debt-free cash-free adjustment above) or to the future financial performance of the target company. It will be important for the seller to get to the deferred portions of the purchase price on the agreed terms and conditions, and therefore that the deferred portions of the purchase price are not left to the investor's discretion. A final, very important component that may affect the final purchase price is the agreement on claims for damages for latent defects and misrepresentations. But more on that in the next posts in the M&A Basics series.
Does it seem too complicated? Your advisors will guide you through the entire process.
P.S. In addition to the above, some other aspects are also important when structuring a transaction, especially the tax implications. However, these deserve an article of their own.