When we first meet business owners wishing to sell, many have a pre-conceived notion of what a sale may look like. They may believe they have to sell 100% of the company, or that they will be forced to stay, made to leave, etc. The two middle-market M&A deals we recently closed illustrate how deals can be structured to give owners what they want. This is part two.
Note: The “Tale of Two Deals” series explores different aspects of two deals that we closed recently in the same week.
100% Buyout by a Strategic Acquirer
One of our recent deals was a 100% buyout by a multi-billion dollar public company. Large companies such as this don’t buy a portion of a small company, so a partial buyout was not an option. If the old business owners were moving on this wouldn’t be a problem. In our case, the business owners were staying put, at least for a number of years, so there was a challenge of structuring something that keeps the owners interested and engaged.
Fortunately, many strategic buyers realize the importance (and necessity) of having a willing and engaged business owner post-transaction. They know that putting them on the payroll and giving them two weeks of vacation allowance probably isn’t going to motivate an entrepreneur that has built, grown and operated their own company.
In this case the buyer used a blend of stay-on bonuses (extra pay that is really part of the purchase price), earnout (performance based bonuses tied to milestones, also a part of the purchase price) and corporate stock options that would allow the owners to earn stock in the parent company over time. Much of the negotiations were centered around making sure the earnouts and bonuses could be fairly earned, and not unreasonably withheld.
Even at that, some ex-business owners just don’t last long under new ownership. It can be just too much of a change from running their company to then having to report to a higher authority. Earnouts do help, because when there is a substantial amount of money on the line, it tends to hold someone’s attention.
In my experience many strategic buyers (and PEGs) will really bend over backwards to accommodate business owners and will put up with a lot of “stuff”, especially if the company is performing. If the company doesn’t perform, not so much.
For example, when I sold my tech company in 1997 to a public company, they wanted me to work at their headquarters in