Two-Stage Deal Structures: What is Wrong with Them?
Two-stage deal structures can work in certain circumstances. Basically, a two-stage deal structure is when you have an initial period (stage one) where the firm’s cohabitate together, typically into the buyer’s existing office, and then close the transaction and then have the seller retire at some future date (stage two).
There seem to be some initial advantages. It allows for a longer transition period. It also allows for the buyer to not start paying the seller for the ownership of the practice right away because the seller will continue to earn the same amount of money that he has been earning.
But there are some problems in two-stage deal structures. First, there’s no money upfront and therefore there is not enough commitment by the buyer. The seller is taking a big risk when they move in with the buyer. The seller will lose his business identity when he merges in with another firm. The identity that is developed over the next year or two will be the buyer’s business identity. So if it doesn’t work out and the seller has to withdraw, he has to start his business identity all over again.
Goodwill can diminish over time and sometimes it does not take for the value to decrease, especially when things are not going well. In addition, while the seller may be the accountant of record for the client, there will be other staff and other partners involved with that client. Let’s say the buyer decides they don’t want to execute on the second stage. Or the buyer and the seller decide they no longer like each other. The seller will need to leave and recreate an entirely new office. When that happens he may lose some of his clients and his staff to the buying firm.
Some of this can be settled in contract issues, but it can get complicated real fast. So beware of the two stage deal and make sure you do it right.