There is a lot more than purchase price that is involved when selling your company. We often talk with our sell-side clients about 5 key points of consideration that are involved in an M&A transaction. These points include purchase price, structure, terms, fit and certainty of close.
1. Purchase Price.
Purchase Price is the most obvious consideration but can be misleading depending upon the other key points. Buyers can be misleading when talking to sellers about deal value. Rarely are deals simply all cash, all the money upfront and the seller can walk away from the company after closing. An offer can sound very attractive but can actually be very different than what it appears initially.
Deals can be structured in many ways. Typically, buyers are trying to mitigate risk through structure. We see private equity firms require equity roll-over as part of a deal structure for example. They take comfort in having a seller remain a large shareholder so that the seller remains interested, financially incentivized and motivated in the future success of the business. Some buyers will agree for both seller and buyer to hold the same class equity security, others will want a preferred or senior equity position to the seller. Corporate or strategic buyers will often buy 100% of a company but look for an earn-out structure where they tie a meaningful amount of the purchase consideration to the future performance of the business.
There are myriad deal terms that can come into play when negotiating a transaction and very often the buyer will try to wait to bring up terms until later in the process when they feel they will have more leverage because the seller may have deal fatigue, be eager to close and more flexible. Terms can include issues such as a shareholder rights, control provisions, what are your preemptive rights if more capital is invested or another company is acquired and there is potential equity dilution, or additional senior executives are hired. Plus, there are indemnity issues that may or not be addressed with rep & warranty insurance solutions or escrow requirements. The list goes on. Deal terms can be numerous and complicated and should not be overlooked.
At Hyde Park Capital we mainly sell large large private family and founder owned companies. When considering the legacy of the business it usually matters to our clients what happens to the company post sale. For sure it matters if they remaining equity holders and are supposed to continue to manage the business. Buyers come in all personalities and have different approaches and cultures. Some buyers are collegial and casual, some are sharper elbowed and more formal. Some buyers are more hands-off and mainly count on managing the company through quarterly Board meetings. Other buyers may have operating partners that they intend to become very involved in the daily operations of the company. Corporate buyers may keep a business stand-alone or may fully-integrate it into their existing business. Unless a seller is walking away from the deal post-close, the fit and how they feel about the game plan and working in the future with the buyer’s team will have a lot to do with which deal they decide to accept.
5. Certainty of close.
The last point is not trivial because of all the time and effort that leads up to identifying and negotiating a potential transaction with a buyer can be a naught if it does not close. We spend a lot of time trying to determine the likelihood of a specific potential buyer or institutional investor actually closing. Our firm has longstanding relationships with many buyers, and they will often candidly share their concerns with us when they might not be as direct with the seller. We may attempt to establish milestones around certain deliverables such as when the financial due diligence (QOE) by a third-party accounting firm must be started, or when we are to receive draft legal documents. If third party financing such as a bank debt is required, this can also impact timing and create additional uncertainty. It is important also to understand who the decision maker is involved in the transaction and the process to get to final approval.