Price is not the only factor when selling your company

Andy was the owner of a healthy and profitable healthcare consulting company, growing nicely.

He put his company up for sale, and hired an advisor to run an action for him. Things were going well, but he was sure the time was right to sell.

After a few months of prep and meeting with potential buyers, his advisor sent him two Letters of Intent from buyers. He forwarded them onto me.

If you’ve seen a few LOIs, your eyes quickly scan to the section marked Consideration or Purchase Price. How much is the offer?

These two were very different.

The first, a private equity bidder, offered £15m total consideration, with £3m cash paid on closing and the remaining £12m paid in an Earnout based on a set of 3-year EBITDA targets.

The second bid was from strategic industry buyer, who Andy had known for a few years. They had offered £7m cash, all paid on closing.

He called me later that day. For him, the private equity was the obvious choice. £15m! That was above even his 'best case' outcome, and he was thrilled.

I had the opposite view....

Having seen a lots of deals, I knew that more factors than just the total price need to be balanced when evaluating bids. He was focused exclusively on 'The Number'.

Some are obvious, others are less so. Let's break them down.

Price Certainty

Is the money guaranteed, or are conditions attached? And how onerous are those conditions?

The most common structure here is an Earnout, where the final amount is determined by the financial performance of the business for a period after closing.

That exposes you to a range of risks – some within your control and others outside. There are many stories about failed Earnouts, fallings out with the buyer and sellers gutted that they never got paid anything close to the maximum amount.

So whilst 'The Number' is bigger, you should expect to not see all of it.

A bird in the hand is worth two in the bush... There is nothing better than cash being wired into your account on the day the deal closes.

Consideration Type

Are you being paid hard cash, or shares in the buyer?

Buyers love to pay with their own shares if they can. It saves them from having for borrow expensive debt to pay you, or deplete their own cash reserves.

If your buyer is a publicly listed company, and you have a short lock-up period (so you can sell those shares quickly if you want)... this may not be such a big deal.

But if there is no ready market for those shares, you are taking a big risk that those will be worth the same or more in the future. If the buyer is a start up, that might be too much of a risk to take.

It also means that you can't easily enjoy or invest your exit proceeds if they're tied up shares that are difficult to sell.

Payment Timing

Are you getting the money immediately on closing, or do you have to wait?

Some buyers will want to pay you the consideration in tranches. Others will hold back some of the funds in case of issues arising with the business, usually putting some of the money in an Escrow account where it can't be touched by either party for a period.

It's obviously better to have the money sooner, so you can enjoy it or let the investment returns start to compound.

Post-Sale Commitment

Are you required to stay on in the business? How long for? Is that what you want?

Some buyers will offer you a 'clean break', where you walk away from the business on the day of closing. They might be merging you with another business unit and want their management team to run the combined group.

Others will want you to stay on for a period, especially if they are using an Earnout as part of the deal structure.

If you are selling because you're running out of energy and want to start a new phase in your life, this might be a tipping point in your decision.

Deal Speed & Certainty

The biggest risk here actually is that you actually get £0.

Many times sellers have chosen a bidder, only for them to start delaying during due diligence and then finally withdraw with a whimper.

You want to deal with a buyer who you are sure is serious about buying you, is ready to move quickly to get the deal done, and has the financial means to pay the price they are offering.

You also want a buyer who can close without conditions, especially if those conditions are out of their control – such as getting anti-trust or other regulatory approvals, or getting sign off from their banks.

There are occasional 'malicious' bidders who are teasing you just to get at some confidential information. But that's rare. More common are speculative bidders, who genuinely want to buy you but are less committed to making it happen. Maybe they are just 'throwing their hat in the ring'.

What are some signs to look out for? You want them to have some experience doing M&A, so this isn't their first rodeo. If they have advisors lined up already, that's great. The rationale for them buying you should be clear, ideally with some nice synergies. That makes it an easier sell to get Board sign off. If you have an existing relationship with some people there, that's good too.

Have a read of this article to understand more about the types of buyers in M&A deals.

That doesn't mean you need all of these factors in place. But if your gut is telling you that this buyer might not get the deal done, you might want to look elsewhere.

Buyer Trust

This is a more nebulous one, but it could be important...depending on your deal structure.

Having trust in your buyer can come to fore in a few different ways:

• Will they protect the brand once they are owners? Will they look after my team and my customers? Or will they shred the team and hike up prices.
• If you're staying on post-closing, will they be a good business to work for? Will they support or interfere? How would I feel having them as a boss?
• If there's an earnout... do I trust them to help us to hit those targets? Or will those promises disappear?

Another gut decision to weigh up.

Risk Allocation

How aggressively will this buyer look to push risk onto me through the sale contract?

The sale contract (usually called a Share Purchase Agreement) contains a number of clauses which allocate risk between buyer and seller in case unexpected issues arise.

Commonly that's things like: the breadth of warranty protection and how easily they can make claims, whether they want to keep money in escrow to cover claims or what happens with any unforeseen tax liabilities.

You could end up with more money, but what if that comes with many 'strings attached', with many ways in which you could have to re-pay some of that money?

Their approach to risk may not be apparent at the LOI stage, but this is something to consider.

Back to Andy...

Once Andy and I talked this through, a bunch of additional factors came out in favour of the strategic buyer.

They had been talking for years, and the two businesses were an obvious fit. He also had known some of their team personally for a while – so they were a keen buyer with high trust.

We took a look at their most recent accounts, and they had plenty of cash on their balance sheet to fund the £7m price.

Their LOI was also short and simple, and they were offering to get the deal done quickly.

All great signs.

The PE buyer had come out of the blue. No red flags necessarily, but none of the healthy signs that our strategic buyer had.

Ultimately, the biggest factor by far though was the offer of getting £7m on closing versus only £3m, with a promise of more later.

Andy's personal share of that £7m (after paying his taxes) would be enough for him not to work again.

The deal closed with the strategic buyer 12 weeks later.