Part 2: Transitions, transactions and trust in business

We are considering an important hypothetical scenario. Two partners set out to sell their company. Most of their net worth is invested in their business and one of them happens to have a health issue – so they want to diversify their wealth holdings. After taking their business to market and receiving an excess of six offers, they ultimately select the offer that allows them to take some money off the table based on a high valuation. However the terms and conditions of the deal are such that the cost of capital is higher than they could have attained from a traditional lender. Instead of selling 100% of the company to the highest bidder, they end up selling a minority position with fewer oversight obligations.

Why does this matter?

There are many ways to take your money off the table when selling a business. The concept of “taking money off the table” in this case, is in reference to entrepreneurs who have built a business, but their net worth is tied up in the company – it’s not cash and therefore is not readily available, like a public stock, which you can sell in the market. The sources available to them to access capital range from banks, to private equity and everything in between.

In this series, we will explain that not all deals are made equal, how to assess offers, important questions to ask during the sales process and how to best access capital.

In Part 1 of this series we set the stage. We established the background of the business and partners involved in this hypothetical transaction, as well as the rationales for selling a stake in their company.

Let’s fast forward and assume the partners have gone through the “dating period” of marketing their firm as a valuable investment and have received multiple offers from prospective buyers – how do the sellers feel about this? In our scenario, the partners decide they will move forward, but want to choose the best offer.

They need to ask themselves: Which offer most closely aligns with our objectives?

Let’s say our owners have four viable options on the table for potential equity partners:

  1. A Global Private Equity (“PE”) Partner with deep expertise in the sector, this group invests in Canadian and U.S. companies.
  2. A U.S. Partner, Public Operating Company (“OpCo”). This group is four times larger than the business being sold. They move a bit slow on the deal front.
  3. A Canadian PE Partner, who invests in U.S. and Canadian companies. They would be a financial partner who have some expertise in the sector.
  4. A Canadian PE Partner, who invests in Canadian companies only. They have minimal experience in the sector.

 

Below are some salient points of each deal, as well as pricing metrics:

Option Who EBITDA Multiple Money Upfront Interest Length of Deal Ownership Retained
1 Global PE Group 6.5 50% 5 years, then sell 25%
2 US Publicly Traded OpCo 4.7 50% + stock based on reaching milestones 50% in US Opco
3 PE Group 3 7.5 50% 20% Minimum 3 years 91% and increases to 95% over time 5% payable on selling the company
4 PE Group 4 5 75% 5 years 25%

The offers range from 4.7 – 7.5 times EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), but are very different in terms of the money offered up front, the length of the deal, and the ownership retained. Note: the valuation of the selling company, to make comparisons simple, has been set up as EBITDA multiple times the EBITDA, which provides the valuation of the business.

What happens next?

With these offers on the table, the partners will now go through a due diligence process with each potential buyer. Post initial due diligence, one of the offers changes and they end up decreasing their multiple. So instead of this buying group having the largest multiple to offer, it turns out they just wanted to be in the game and were likely never going to offer the multiple.

Which offer would you prioritize first?

Option 1
Option 2
Option 3
Option 4

Of course, one of the biggest elements to consider in this transaction – the unspoken elephant in the room – is the issue of trust.

The entrepreneurs will be entrusting their business to a new partner, who will acquire the majority of the company. The majority owner will have board representation, identifying which decisions require board approval. And of course, the buyer of the business must trust this asset will be efficiently run, and can sustain bumps in the road without the wheels falling off the wagon.

The goal is a return on investment (ROI) for the buyer of the business. So the acquired business must continue to grow or maintain its performance.

What additional information would you want, when assessing which offer to take?

Stay tuned for Part 3 of this series!

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