When selling a business, it’s only natural to want to negotiate for the highest price you can. In the context of the advisory business, this has led to a growing focus on the “going rate” valuation multiples of revenue or earnings (EBITDA), with advisors asking what they can do to maximize the overall sale price for their firm. Yet the caveat is that when it comes to the sale of advisory businesses, deals are almost never structured with the total purchase price paid at closing. Instead, deals are commonly structured with a significant component of the purchase price to be paid out years after the closing, and only if the seller meets certain milestones, which can be challenging to achieve. Sellers who gloss over or misunderstand these nuanced deal terms can receive less than they originally envisioned when negotiating the deal, such that what sellers “expect” to receive as a valuation multiple when the deal is struck may be substantively different than what they actually receive in the end.
In this guest post, Rich Chen, founder of Brightstar Law Group, explores how today’s serial acquirers of advisory firms commonly include retention, earnout, and other post-closing contingencies that can materially shape what sellers will actually receive for the sale of their firm.
The first key to recognize in evaluating the offer letter for an advisory firm acquisition is that in today’s environment, deals are rarely ever paid out fully in cash at closing. At best, only 80% of the deal may be paid when the transaction closes, and in many cases as little as 50% or even just 25% of the deal occur in cash. Which at the very least, means advisors must adjust for the time value of money, at a reasonable discount rate (that reflects the risk of being an implicit creditor of the acquirer!), for the fact that much of the proceeds may take as many as three to five years to be paid out.
