There were 3 decent offers each presenting a different scenario with different money and structures. Jim, with Rob’s help, considered each offer carefully. Since Jim was only 52, he had a lot of productive years left and he wanted to use the experience that he had garnered building and managing his company over the last several years.
Offer #1 was a good offer. Jim would continue managing his company but the final decisions of any size or consequence would be made by the acquiring company. Jim was not too happy with the structure – the note and the earnout. He had heard (and read) that you have to be careful with earnouts because the acquirer can do things to make it very difficult to qualify for the earnout.
Offer #2 was an interesting offer. The $2.4 million offer for 70% of Jim’s company was based on a 100% valuation of just under $3.5 million. But Jim retained 30% of the company and he felt that with the professional assistance that he would receive, and the increased motivation of his key employees to eventually cash out, that his 30% in 5 years could be worth more than his 70% now.
Offer #3 seemed like a good offer on the surface. Jim didn’t like the idea of joining a large, public company that was in serious acquisition mode. He learned that they had 2 offers in addition to his on the table. Jim was also concerned about the stock portion of the offer. The acquirer’s stock price had been rising quickly recently. But how long would that continue and Jim would have to wait a few months before he could sell the stock?
After careful consideration, Jim chose offer #2. He liked the people that he would be working with at the PEG. It didn’t seem to be as impersonal as the other organizations might be. He liked the independence that the opportunity presented and the professional assistance that he would receive. Also, he had a good chance of making more money with the PEG than with the other options.
NOTE: This transaction took place in 2006 during a period of a “perfect storm” for business sellers – low interest rates, great access to capital, hungry buyers, and low capital gains. Also, Jim’s company had the attributes that the strategic and financial buyers like – good cash flow and low risk factors. However, this case study must be labeled an aberration since the vast majority of companies that go to market don’t sell and those that do sell for a price well below their potential.
I’ll address this problem further in future articles.
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