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The acquisition of a business involves a complex interplay of financial considerations and protection mechanisms. A crucial aspect of any deal is determining how the buyer will finance the purchase. Parties utilize various methods, including cash payments, securities, and hybrid approaches, to structure purchase prices. Each method has multiple advantages and disadvantages, as do the strategies buyers and sellers can employ to protect their interests. This article will discuss consideration only for transactions between private companies.

1. How Buyer Can Pay for Acquired Stock or Assets.
   • Cash. It gives more liquidity.
     • Borrowed cash (leveraged transactions)
     • Own cash
   • Securities. Securities issued by the company to pay for the purchase price can be registered or exempted from the registration with the Securities and Exchange Commission (“SEC”). Unregistered securities means that no registration statement is filed with SEC. Small businesses usually look for exemptions to registration, such as Regulation D private placement or similar private offerings. 

2. Ensuring Each Party’s Interests.

Seller usually requests various purchase price guarantees and protection measures to ensure that the purchase price will be paid. These include:

• Security. For example, the purchase price can be secured by the buyer’s assets if the buyer issues debt securities to pay. Alternatively, the seller may request a pledge of stocks. 
• Commitment letters. Commitment letters are issued by lenders who lend money to the buyer. The buyer usually presents the letters to the seller during the due diligence stage, and the letters give the seller some guarantee that the seller will be paid.
• Bank letter of credit. The letter from a bank is supposed to show that the buyer has access to the required funds to pay for stock or assets.
• Financial Statements. The buyer’s financial statements can show a healthy financial condition, including revenue, profits, and current cash, etc.

At the same time, the buyer may seek various mechanisms to minimize the risk of paying for undisclosed surprises, diminishing the true value of the target. These mechanisms are often used to acquire private companies which do not use GAAP or similar accounting standards. The buyer usually requests the following, but sometimes they may benefit the seller as well:

• Post-closing purchase price adjustment. It is intended to protect the buyer against the seller’s manipulation of working capital or other measures purported to artificially raise the value of the target. The purchase price adjustment process typically involves comparing the specified financial measure as indicated on the closing date financial statements of the target company to the same measure as indicated on the financial statements at the time the acquisition agreement was executed.
• Earn-out. Earn-out is used when parties disagree on the value of the company. In this event, one part of the purchase price is paid at closing, and the other part is paid in the future and is contingent on the performance of the target. It is often used for start-ups when founders anticipate rapid growth, but the buyer is uncertain about this prediction. For a seller, an earn-out provision can increase the overall purchase price if the target performs well. For a buyer, it can mitigate the risk of overpaying for the target.
• Escrow account and agreement. Escrow funds are funds put in the hands of a third party, such as an escrow agent, to cover post-closing purchase price adjustments, any contingency under the acquisition agreement, and indemnification claims. Escrow funds benefit buyers by ensuring payment of their post-closing demands. Sellers may seek escrow to be the only post-closing remedy when they have third-party investors and strive to eliminate other remedies.
• Offset rights. They are even more beneficial for the buyer than an escrow mechanism because offset rights give the buyer control over funds.

3. Structuring the Purchase Price
   • Cash
     • Deferred payment. It is structured as payment of a few installments spread during a designated period of time. Deferred payment allows buyers to make all future installments contingent on the target company’s performance. Even if there is no contingency in the terms of the agreement, with deferred payment, the buyer will achieve the leverage to offset installment payment for indemnification if the target’s performance does not reach the level represented by the seller.
     • Promissory note.  As deferred payment, promissory notes give a buyer leverage to retain some payments under the note to cover the buyer’s indemnification claims if they arise. These types of promissory notes usually include the following terms:
       • Prepayment without penalty
       • Acceleration in case of default
       • Moderate interest
       • Offset rights (they allow a buyer to offset an unpaid portion of funds under the note against indemnification claims)
       • Security of payment (the seller may want to secure payment of the purchase price under the note by collateral, especially if the buyer’s financial capability is not strong. The collateral can include:
         • Assets transferred to the buyer
         • Stocks acquired by the buyer (pledge of stocks)
         • Stocks of the company holding acquired assets
         • Any other asset
       • Subordination of the promissory note to the rights of other creditors.
     • Payment of the total amount of the purchase price at closing.
   • Securities
     • Stock. Different types of securities may be issued as consideration in the acquisition transaction. The most common ones are common and preferred stock. Preferred stock may be structured to convert into common stock when certain circumstances occur.