I think we can agree that, at some point in our entrepreneurial lives, we will exit our companies; whether that is voluntary or not, we WILL exit. For those who prepare (assuming you are not handing your company over to your employees or children), there should be multiple offers to consider when that time comes. I won’t get into the preparation phase, as I have multiple blogs already on that, plus a quiz to see how ready you are today. Instead, this article focuses on what you look at BESIDES PRICE when deciding amongst multiple offers and buyers.
My goal, always, as a sell-side M&A advisor is not only to bring my clients multiple offers, but also to get the price of those offers so close to one another that you don’t make a decision based upon price, but instead the 6 points I list below. If you are selling into a portfolio company, then all points below are applicable. If you are being acquired by a strategic company, points 1 – 4 are more applicable for your situation. Let’s dive in.
6 Points to Consider When Choosing Between Multiple Offers
- The terms: cash, earn-out, seller financed note, equity, bonuses.
I think we can all agree that a $10M all-cash offer is better than an offer with $9M cash + a $1M earn-out, right? They both equal $10M, but one has the potential of not being achieved. While most offers contain more terms than just cash and earn-outs, it’s important to decide how realizable each term is and whether you want or need to stay in order for the earn-out to be realized.
- The size of the company acquiring you.
If you currently have a 25-person organization and you are potentially combining with a 300-, 400-, or 500-plus-person organization, what effect will that have on your team? I suspect some of your team likes the smaller, more intimate corporate setting, while others may like the opportunity to grow into other roles now being offered at the larger corporate level. There are times, however, where you may be acquired and left as a stand-alone entity, in which case life continues as it did before. Therefore, be sure to understand if you will actually be integrated into the portfolio or parent company or if you will remain on your own island, which has its benefits as well. And then, assess what effect that will have on your team. If you think you will lose too many people in the process of combining with a larger firm, then consider offers where you can remain independent. Unfortunately, you will have to assess this on your own, as you don’t yet want to share any news with your employees. Ideally, a second-in-command can help you gauge the team.
- Your role going forward.
This is always a big question that is discussed early in the process. Assuming you are staying, this can sometimes be difficult to determine because you don’t know what you are jumping into with the new acquiring company. Regardless, if you love mentoring and managing people and not doing sales, you should voice that concern in the beginning. The earlier you can carve out a role for yourself in the new organization, the easier the emotional process of selling your company becomes.
- The strength of the portfolio president or CEO.
After all, they are the person leading the charge to acquire new tuck-in’s or add-ons. Do they have vision? Can they handle all the personalities of the newly-acquired CEOs? Will they attract others easily to the portfolio? Many times, PE firms will switch out the original CEO or president because they either don’t have these qualities or, frankly, don’t want the job, which usually requires a lot of travel and salesmanship. If you are not inspired by the portfolio president, it is likely others won’t be either, which will make it harder for the portfolio to grow over time. And growth is what every PE-backed company wants. Plus, it’s what you want if you are rolling equity as part of the transaction. Finally, on this point, how much interaction will you have with the portfolio lead? Most acquired CEOs want to maintain some sort of leadership role and want to easily be able to get face time with their new boss.
- The strength and experience of the PE firm backing the deal.
Everyone who has amassed some money, either personally or through a fund, now calls themselves a PE firm. And clearly, not all PE firms have the same level of experience in your industry. Personally, I would shy away from a firm where this is either their first portfolio company or their first in your area of specialty (especially if rolling equity). Mistakes will be made by these early-funded PE firms, and you don’t want to be the one to suffer those consequences. Be sure to review their website at the outset for current portfolio companies and those they have exited (very important), as well as how many tuck-in’s or add-on’s they have added into the portfolio company you will be combined with.
Next, understand if they are truly a PE firm with outside investors or a family office. There is usually a big difference in the strategy and cadence between the two. PE firms will always have the pressure of their investors to perform, and they are usually on track to sell a portfolio company in 5 – 7 years. A Family Office doesn’t have that same pressure. They like to purchase companies that are profitable and hold them for extended periods of time, as long as they yield nice returns. Therefore, again, if you are investing equity into the portfolio company, it may take you longer to get that second bite of the apple with a family office. And even if they have a goal of selling in 5 – 7 years, they usually don’t move at the same speed as a PE firm because, well, it’s their money and they can do things on their own timeline.
- When is the next recapitalization event?
This will determine when you can take some chips off the table. It’s important to ask how far they are in their fund journey. The further along they are, the less money you will make when they sell, but it will come sooner. If you are not the actual portfolio company, you like to be somewhat early in the fund. Maybe not the first one, so you don’t have to be the guinea pig on integration, but ideally shortly thereafter. As part of your decision process, don’t be shy to ask the PE firm how long they plan on holding the portfolio and at what multiple they plan on exiting. They all have projections around this, so it’s not an unknown for them. Of course, no one has a crystal ball on how the economy will look. But given no major events, they should have a pretty good idea. They should also be able to tell you what your equity investment should yield and what the price of the stock is valued at today. Finally, as part of understanding the stock price, also ask if there are multiple classes of stock, which class you will be, and what exactly that would mean should things not work out well in the end. Do you get your investment back with interest only? Or what?
Finally, there may be a situation where you sell to a strategic company/competitor who is looking to attract PE money in the not-too-distant future. They may have already made some acquisitions and either used their own cash flow to fund the deals or received some debt to help make those acquisitions. I recently closed two transactions where this was exactly the situation. In this case, you really have to look closely at the CEO/president. Not only do they need to continue to attract sellers, but they need to attract outside investors (PE firm) as well. This is really hard to do for just one person, so you need to look at the management team behind the CEO as well to make sure they can support these efforts. Be sure to understand their timeline and how close they are to attracting this first round of equity (beyond friends and family). In this case, you are really betting your equity on the CEO and management team, so be sure you understand their execution plan timeline completely.
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