Best Practices for Deal Structuring

Introduction

Deal structuring is a process of designing and executing contracts between two or more parties to form an agreement. It is a critical part of the negotiation process, when parties are looking to achieve mutual understanding and reach a successful conclusion. This method is especially beneficial when managing multiple aspects of a complex transaction or agreement.

Benefits of properly structured deals can include cost savings and risk reduction, as well as furthering healthy relationships between the parties.

Identifying Goals

When discussing deal structuring, it is important to remember that success depends on understanding and addressing the needs of both buyer and seller. Establishing clear goals, accounting for all potential impacts, and having an understanding of market conditions is essential.

Analyzing Buyer and Seller Needs

The most successful deals are those which fulfill the long-term needs of the buyer and seller. Prior to structuring a deal, it is essential to understand the motivations of both parties and identify their desired outcomes.

Questions that should be asked include: What is the buyer’s main objective? Does the seller need cash now or equity in the long-term? Is the seller looking for capital investment, a business partner, or an exit opportunity? Are there any legal issues that need to be addressed? Once both parties’ needs and motivations are defined, then the deal can be tailored to meet those needs.

Considering Tax Implications

An important part of deal structuring is planning for taxes. Different strategies can be used to minimize the tax impacts of a deal, so understanding what is at stake is essential. It is important to ensure that both parties understand the tax implications of the deal terms, and that both are in agreement with the structure before it is finalized.

Prior to structuring the deal, review currently applicable tax laws and regulations, and consider relevant third-party agreements. These should be factored into the deal structure to ensure that all parties are aware of the potential tax impacts.

Securing a Competitive Edge

Securing a competitive edge is also a key factor when assessing potential deals. Consider the deal in the context of other similar transactions in the area. Are you maximizing value for both parties? Do you need to offer more incentives or concessions to make the deal more attractive?

The best deals are those which offer something unique and exclusive to both parties. Analyze market conditions and develop creative solutions that can create a win-win situation for buyer and seller. Try to find ways to leverage the deal so that both parties are better off after the transaction than prior to it.

Developing a Strategic Approach

When creating a deal structure, it is important to develop a strategic approach to ensure that the terms of the deal serve the interests of all parties involved. This involves careful planning with regard to accounting methods, valuation methodology, and legal structures.

Planning Accounting Methods

The accounting method used in a deal can have a significant impact on the financial results of the transaction. Accordingly, it is important to carefully select an accounting method that better meets the needs of everyone involved. For example, when dealing with mergers and acquisitions, the accounting methods used must be appropriate for the industry, size of the deal, and other factors. It is also important to select an accounting method that meets all applicable legal and regulatory requirements.

Deciding on Valuation Methodology

Valuation is a key factor in ensuring that all parties get a fair deal. There are a variety of methods for valuating a company, including discounted cash flow analysis, comparable company analysis, and asset-based valuation. When selecting a valuation method, it is important to consider the industry and size of the deal, as well as the complexity of the transaction and the preferences of both parties.

Choosing Legal Structures

Legal structures, including contracts, agreements, and other documents, should be carefully chosen to meet the needs of all parties involved. For example, complex deals tend to require more detailed and comprehensive legal documents, while simpler deals might require only basic documentation. It is important to fully understand and select the appropriate legal structures to ensure that all parties are protected and that their rights and obligations are clearly specified.

When crafting a deal structure, it is important to approach the process with a strategic mindset. Careful planning should be done with regard to accounting methods, valuation methodology, and legal structures in order to ensure that everyone involved is getting a fair deal.

Understanding the Elements of Structure

When structuring a deal, it is important to consider the various elements that play a role. These elements can be divided into four categories: price, payment terms, warranties, and contingencies.

Price

Price is the money to be exchanged for goods or services. It is important to agree on the monetary value that both parties are willing to accept in order for the transaction to take place. Additionally, the terms of payment must be agreed upon in order to protect both parties.

Payment Terms

Payment terms refer to the conditions under which the payment should be made. This includes the required payment amount, the payment methods accepted, and the due date. It is important to ensure that the payment terms meet the needs of both parties before any transaction takes place.

Warranties

Warranties are a form of protection provided to the buyer, guaranteeing that the goods or services offered will meet the expected standards. Warranties are typically based on the quality of the product or service, as well as the duration of the contract.

Contingencies

Contingencies are conditions that must be met in order for the deal to be finalized. This could include a third party’s approval, the resolution of a legal dispute, or the receipt of additional information. It is important to consider the potential contingencies before finalizing any deal.

Drafting and Negotiating the Agreement

Part of making sure that a deal is successful is making sure that all parties have a clear understanding of the agreement. When a deal is being structured, there must be a comprehensive and accurately written agreement that is carefully negotiated so that contractually all the expectations are clear and agreeable for all parties.

When drafting and negotiating an agreement, the following are essential best practices that should be adhered to:

Outlining Deal Points

One of the most important stages of the process is to carefully outline the deal points. This helps to ensure that all aspects of the deal are understood and documented properly. Before negotiations can start, it's important to have a clear idea of what each party expects from the other, what each party can provide, and what kind of collaboration and decision-making rights are expected to be involved.

Setting Timetables

Once the deal points have been outlined, it is important to negotiate and include timetables which can be used to measure progress and deadlines. This not only helps to ensure that expectations are met without delays, but also helps to maintain proper communication between the two parties so that any issues can be addressed and resolved in a timely manner.

Investigating Partner’s Qualifications

Before a deal is finalized, it is important to investigate the partner’s qualifications such as their history of successfully negotiated deals and their personal and professional references. This will help to provide an extra layer of assurance that the partner is reliable and trustworthy. Additionally, it helps to ensure that any future disputes can be avoided and any issues can be resolved quickly and amicably.

Implementing the Deal

The best practices for deal structuring aren't complete until you have successfully implemented the deal. As part of a successful deal structuring and implementation, you have to establish servicing policies, assign closing roles and meet disclosure requirements.

Establishing Servicing Policies

Establishing servicing policies is one of the most important parts of implementing a deal. Servicing policies are the protocols and procedures you create to oversee the daily operation and maintenance of the asset. Servicing policies should cover all aspects of asset management, from financial accounting to maintenance, and should be consistently implemented to ensure proper and consistent asset performance.

Assigning Closing Roles

Once you have established servicing policies, you'll need to assign closing roles for the deal. There are a variety of roles that need to be filled in order for a deal to close, including buyer, seller, lender, closing attorney, title company, and any other third parties. Each of these roles should have specific responsibilities and expectations associated with them in order to facilitate a successful closing.

Meeting Disclosure Requirements

In order to successfully implement a deal, you'll also need to meet all applicable disclosure requirements. These requirements can vary by state, so make sure to review the specific regulations that apply to your deal. Disclosure requirements usually include providing buyers with certain documents related to the asset, such as maintenance records or financial statements.

In order for a deal to be successful, you need to make sure that you address all aspects of implementation. Establishing servicing policies, assigning closing roles and meeting disclosure requirements are all essential components of a successful deal implementation.

Conclusion

Deal structuring is an important part of any business transaction. Properly structured deals that account for the needs of all parties ensure that a transaction is successful for everyone involved. This article outlined seven best practices for deal structuring. Understanding the fundamentals of deal structuring and following these best practices can help you ensure that your business transaction is successful.

Summary of Best Practices

The best practices for deal structuring include:

• Conducting thorough due diligence.
• Analyzing existing contracts and limitations.
• Creating clear and concise contracts.
• Negotiating reasonable terms.
• Ensuring that both parties are protected.
• Accounting for all expected costs and saving money.
• Following industry regulations and best practices.

Importance of Deal Structuring

It is essential for any business transaction that the deal is structured correctly. Proper structure ensures that all parties involved are adequately represented in the agreement. Without structure, a deal could fall apart or be unenforceable and that would lead to costly legal recourse. By following best practices for deal structuring, businesses and organizations can ensure that their transactions are successful and beneficial for everyone involved.