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Consideration Shares

Definition - What does Consideration Shares mean?

Consideration shares may be offered as non-cash consideration by a buyer in a transaction. The shares offered may be common voting shares, non-voting shares, or preferred shares with the right to preferential dividends. The issuance of consideration shares is common by public company buyers, since the value of the shares can easily be determined. However, private companies also issue consideration shares, which requires the seller to conduct additional due diligence on how the value of the shares is determined.

Divestopedia explains Consideration Shares

Cash is the best consideration since there is no risk associated. With any other form of consideration, there is additional risk which the seller needs to be compensated for in the form of future return.

When consideration shares form part of a transaction structure, the key questions are:

  • How is the value of the consideration shares determined, and are the assumptions in this valuation reasonable?
  • What is the future value of the shares when they get monetized, and will the eventual return compensate the seller for the associated risk of holding them?
  • How easy will it be to monetize the consideration shares in the future?
These are difficult questions to answer during seller due diligence. At a minimum, the valuation methodology should be assessed - is it an EBITDA multiple that is being used? If so, trailing 12 months or an average of 3 years EBITDA? Is the multiple reasonable against other comparables?

The seller should also review the buyer's previous history of creating value for its shareholders. While the past is not indicative of the future, a history of success goes a long way in generating confidence that the shares received may actually be worth more when they are sold in the future.

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