The U.S. mergers and acquisitions (M&A) market is at an all-time high. The competition between buyers for attractive acquisition candidates is driving up valuations. In fact, transaction multiples of 10 or more are now considered common. However, there is also a dark side to a hot M&A market, which includes the use or creative deal structures. These structures often include items, such as seller financing and earn-outs, which are used to bridge gaps in the capital structure.

Sellers naturally want to present their businesses in the best possible light, since they are often valued based on multiple earnings before interest, income taxes, depreciation and amortization (EBITDA). In a market with heavy M&A activity and high valuation multiples, private equity (PE) firms actively seek strategic and synergistic investments. However, in this atmosphere, there are inherent risks to buyers, who may potentially pay a premium for their target or assume unexpected risks.