What Founders and CEOs Wish They Had Known Before Selling Their Company / Part 2 of 2

Navidar | December 16, 2021

In part two of this post, we reveal three more “surprises” that founders and CEOs often discover when embarking on an M&A transaction process.

You can find part one of this post here.

Surprise #4: It Can Sometimes Take a Long Time for International Buyers To Come To the Table

We once had a brilliant CEO tell us that he was getting tired of waiting for a group of foreign buyers to decide whether they were interested in buying his company. These buyers had asked for information and were analyzing it, but were not moving fast enough in our client’s opinion. He suggested that we “draw a line in the sand” and tell the various international buyers that if they did not express interest by a certain date, they would be excluded from our sale process.

Fortunately, we were able to convince him that doing so would not be in his best interests or those of the other shareholders because we believed that the foreign buyers were sincerely interested and would eventually prove themselves to be excellent potential buyers. These buyers simply needed more time to evaluate and understand the company. As it turned out, a foreign buyer offered a significantly higher valuation for our client than any of the domestic buyers in the process and acquired them.

Key Takeaway: Your banker needs to have global relationships with potential international buyers and must include them in the process in a thoughtful way, which often involves early outreach so that all the buyers, both international and domestic, are ready to submit bids for your company at (approximately) the same time. Doing so will ensure that you have the best bids from the broadest range of interested parties and maximizes your chances at getting the most favorable terms.

Surprise #5: Cash is King, or Is It?

If all of the legal terms were identical, would you rather accept an offer of $80 million in cash for your company with no earn-out or an offer of $70 million in cash and a $30 million earn-out? When bidding on a company, buyers often offer a combination of cash, stock, and contingent consideration, the latter term referring to structures like earn-outs that offer additional compensation that may be earned if certain agreed-upon targets are achieved in a period of time after the transaction is completed. These earn-out targets may be based on metrics such as revenues, gross profit, operating profit, number of units sold, or any of a range of other metrics that the buyer and seller agree to as part of the sale transaction. Certainly, some CEOs and shareholders want only cash, and we totally understand that, but consider how you would answer the question at the beginning of this paragraph if you and your team felt that the $30 million earn-out could definitely be achieved within 12 months after you had been acquired.

In that case, you would receive a total of $100 million with the earn-out compared to a total of $80 million with the other offer. We would note that this is of course a decision for the CEO, major shareholders, and the board and that there are a range of factors to consider. But we would also point out that a number of Navidar’s former clients have done exceptionally well by deciding to take offers that had contingent considerations such as earn-outs in them.

Key Takeaway: We advise CEOs and founders to keep an open mind about the various offers the company receives and to carefully consider the different components of the overall valuation because the “best deal” may not be the all-cash offer you receive.

Surprise #6: The Buyer of Your Company Might Actually Want You To Stay for a While After the Deal Is Completed 

To be sure, most buyers will want senior management and key personnel at the acquired company to stay on for a period of time, usually six to 12 months, after the acquisition. However, if you are leading a high-growth, disruptive company, which is Navidar’s typical client, then the “standard” rules may not apply. We advise our clients to be prepared for this possibility.

For example, Navidar has had a number of buyers of our clients actually want certain key personnel, often the CEO and CTO, to stay on well beyond the typical six- to 12-month period (like two to three years) and take leadership of the business unit inside the acquirer after the deal. In one of our sale processes, the buyer wanted to combine our client with an internal business unit and have our CEO run the combined business. In another one of our sale transactions, the buyer offered the CEO of our client a very senior job running all of the e-commerce operations for the global business, which included our client’s former company and a great deal more.

Key Takeaway: You and certain key members of your senior team may well be wanted by the acquirer for your leadership, know-how, and skillset. The acquirer may make it worth your while to stay on longer at the combined company than CEOs and founders typically do after M&A transactions are completed.

We hope that this two-part post provided insight into some of the biggest surprises experienced by the CEOs and founders we’ve worked with during the M&A transaction process. Understanding these potential factors and being prepared to address them will position your company to be successfully acquired under the best possible terms and valuations.

If you would like to discuss any of the advice provided above, or if you are currently seeking counsel on a potential M&A transaction, please contact Stephen Day at [email protected] or (512)765-6973.