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September 28, 2005 10:22 AM

Categories: M&A and Financing

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UK MD

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Joined: 09/02/2005

I appreciate that the immediate response is "they're all different", however we were offered outline terms recently that were comprised the following;

$500K for the Assets of the company - i.e. the software, IP etc.
$900K for 3 years salary for the two shareholders of the company
$700K "earn out" described as commission i.e. something we'd have little control over.

This was then described as the total offer of $2.1M for company.

It is usual to offer terms structured like this, especially with splits as shown above, and particularly with salary being such a large percentage (as is the difficult-to-influence Earn-out).

Thanks.

Discussion:    Add a Comment | Comments 1-2 of 2 | Latest Comment

September 28, 2005 10:40 AM

You summed it up well when you said "They're all different". The deal that's been proposed looks like the company will cost $500K to the buyer and that the company itself will need to generate the balance (over 75% of the deal) without costing the buyer any cash. This means that there is significant risk that you will not see all of the other $1.6 million. Only you can evaluate whether this deal is worth it based on the other alternatives you have available:

-- Keeping the business and earning the $1.6 million (or more or less) during the next several years yourself from the business.

-- Selling it to another buyer who will give more cash up front.

I have seen many offers like this. They are cheap and low risk for the buyer. If I was the seller, I would want to see a higher percentage of the selling price as cash up front. Most of the deals I've worked on give 80-90% of the cash up front. However, I don't know what your circumstances, alternatives, and risk profile are.

September 28, 2005 11:57 AM

Yes, our take on the offer was that it wasn't being realistic, and the buyer was being very self-serving (there's a thing!).

We have an established happy client base, we are growing consistenly and have an innovative high quality product. The only risk to the buyer was whether they capitalised (small "c" ) properly on the acquisition or simply failed to get the most out of it.

We decided to say a polite "no thank you", based on what we perceived the low valuation of the asset, the offer of 3 years salary dressed up as part of the valuation, and the high risk to us of the buyer failing to do their part in motivating a global sales force to give us at least a fair chance of hitting the full earn-out (let alone the fact that other unforseen future events could knock us for six).

We're at a cross-roads in terms of what we need to do to take the company to the next level of growth, and perhaps find a CEO who wasn't in it to simply feather his own nest and isn't passionate about technology etc.

Your comments align largely with our own view.

Thanks Bert.

Discussion:    Add a Comment | Comments 1-2 of 2 | Latest Comment

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