We (Woobridge Group) brought seven offers before our client, ranging from the high end at $39 million, $26 million and $25 million, down the low end at $12 million cash at close. The higher offers consisted partially of future payments, so to compare the cash flows you need to discount the payments. Discounted to present value, the offers ranged from $27 million, $21 million and $20 million, down to the same low end of $12 million cash.
The client ultimately chose the $20 million offer, the third highest in terms of the net present value of the payments. Why?
Deals consist of a wide variety of compensation types and deal structures, and often there is no way to predict the best deal for a particular seller. Some sellers live by the saying that “Cash is King” and some will gladly roll the dice and sign up for a promissory note or even future contingent payments.
I’ve met both types. One would look at the $39 million in future payments and imagine what they could do with that money. They are, after all, entrepreneurial and not very risk adverse since they started and grew their company to start with. Why not go for the moon? The other type of seller would look at the $12 million in cash and say to themselves, “I know that I can provide for my family and their children with $12 million cash, and I don’t want to risk having any less under any circumstances.”
In this case, our client choose a middle ground. He received a healthy amount of cash at close (around $9 million) and the rest was spread out over a number of years, tied to his company’s performance (an earnout). He weighed the cash offers with the risk of the earnout payments, and ended up choosing a comfortable blend.
Here are some types of consideration typically included in middle market deals:
– Secured promissory notes
– Unsecured promissory notes
– Freely tradable public company stock
– Restricted public company stock, bound by rule 144
– Private company stock
– Salary increase or consulting agreement
– Short term earnout
– Long term earnout
Deal structure too is an important, sometimes critical component. The difference between a stock sale and an asset sale can mean a substantial difference in the amount of the money a seller receives after tax (especially in a C-Corporaton sale).
Important Deal Structuring Items:
– Asset vs. Stock sale
– Structuring of balance sheet items such as working capital
– Employment agreement
– Non-compete agreement
– Earnout terms such as number of years and basis of earnout (revenue, gross margin or earnings)
– Intangible terms, such as whether a particular buyer plans to move the company, layoff employees or change the direction of the company
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