M&A: Look beyond dollar signs

Q. How should I vet each offer I received to determine which to accept?
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Wednesday, August 29, 2018

A. It may surprise you to learn that many times a high offered price is not always the best deal. Many other factors must be considered before accepting an offer. 

The structure of each proposed offer is also a vital consideration. Is the offer a stock/membership sale or the acquisition of assets? Each carries different opportunities and challenges.  Many offers include other components besides cash at closing.  They may include a hold-back amount for representations and warranties associated with the transaction. There may be notes, stock, assumptions of liabilities and some assets that may be excluded from the sale.    

Most transactions that close have a sound and realistic strategy behind them. Just as you have a strategy to sell the business, you need to understand the buyer’s motivation for the acquisition. If the offer comes from a strategic buyer (not a financial investor or sponsor) you need to assess how that buyer’s strategy integrates with yours. Identify where synergies exist that can enhance the strength of the business, its growth trajectory and profitability post-closing. 

If it is a financial investor, you need to crunch the numbers to determine if the offered price fits appropriately into the financial model they are pursing. If you are retaining equity in the transaction, it is also important to understand how your business balance sheet will look on the day after closing. Many financial buyers leverage the transaction to minimize the amount of cash needed at closing. That leverage (debt) usually sits on the balance sheet and is repaid by the on-going cash flow of the business. Your retained equity is essentially being reinvested back into the company, so you need to be aware of the risks and rewards of the investment.