“If deals have already been done and advisors are in the first year of their earn-out, the swing factor is really going to be: Does the earn-out vary based on market performance or is it based on the runoff of client revenues?” If the seller had only signed on for a one-year earn-out, they will likely worry less about market trouble, Echelon said.
Again, future deal structures will likely change, says Matt Cooper, president of Newport Beach, Calif.-based Beacon Pointe Advisors, a firm in acquisition mode.
“Buyers will most likely expect the sellers to share the risk associated in the market volatility and take less consideration upfront, with earn-outs over a period of time, typically one to three years.”
Cooper said several factors are at play if two firms in the current market are still hoping to strike a deal.
“There are critical points in the deal process,” Cooper said. “Signing a binding letter of intent (LOI) or definitive and binding purchase agreement are meant to signal negotiations have stopped, and assuming no adverse material change to the business—typically [a] dramatic revenue decline and/or client loss—and each party executes on specified points, the deal will close on a stated date. Closing means the ownership in the business changes hands in exchange for consideration, either cash or stock. Points to execute on between signing and close are typically spelled out, but will include notifying clients of the pending transaction.”
However, he said, buyers may not be obligated to close as negotiated before signing the LOI or purchase agreement if there is a “material adverse change” to the business.
“At this point, there may be a re-negotiation or the deal falls apart,” Cooper said. “It’s likely the worst-case scenario for a seller who believed they had a deal done. It’s disappointing for buyers as well. Nobody wants a deal to fall apart.”