Part 4: 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.

Welcome to Part 4 of our series on assessing trust and capital during a transaction! In previous posts we discussed how to determine if a deal makes sense, how to approach offers and important questions to ask during the sales process. Please feel free to review Part 1, Part 2, and Part 3 of this series.

We’ve been following the journey of two owners who were originally interested in selling their business, in order to take money off the table. But after reviewing the offers they received and going through due diligence, (see previous posts in this series!) they decided they would rather take on debt-like capital, which they would pay interest on each year. They were debt-free currently.

Why did they come to this decision? Once the owners realized buyers would require them to stick around for five years to get the rest of their payout, they became more interested in the offer which allowed them to keep most of the company and take some capital off the table while maintaining the majority of the business. The buyer offering this option seemed down-to-earth and the calculation method for interest payments each year, which would be paid quarterly, was simple for the sellers to understand.

You might be wondering if the price of capital on the offer was expensive? The business had no debt on their balance sheet, and the offer was to pay 20% interest every year.

A second round of investor partners were approached to see if cheaper forms of capital could be attained and what the terms and conditions would be.

Here’s what came back to them…

Option Who EBITDA Multiple Money Upfront Interest Buyer Participation Length of Deal Ownership Retained
1 Alternative Capital Provider 1 6 25% 6% Quarterly paperwork and other metric reporting required 5 years 100%
2 Alternative Capital Provider 2 5 25% 5.5% Quarterly paperwork required and other metric reporting required 5 years 100%
3 Canadian PE Group 3 7.5 50% 20% Top line revenue required monthly Minimum 3 years 91%, increases to 95% over time

Option 3 was one of the initial groups from the previous round of negotiations (read Part 2 of the series). They were still the most expensive form of capital.

The other two capital providers who offered term sheets had much lower interest rates, however they had other terms related to payment, including certain financial performance metrics (also known as covenants), which the company would have to report on. One of these two offers also came from the corporate group of the selling company’s existing bank.

What should the sellers do now? Find out in the final part of our series, coming soon!

Stay tuned for Part 5 of this series.

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