If you are waiting for that next big deal before you sell your company, you may want to re think your approach. An intelligent structure may be the way to help you capture the most value. You have made the decision to sell your company. Maybe it was because a major company in a related industry just acquired a direct competitor. It could be that one of the industry giants recently acquired one of your small but worthy competitors and has removed the risk component of a buyer’s decision. Maybe your fire to compete at your top level is not burning as brightly as it once did.
These are all good reasons to set your business sale process in motion. A critical element here is time. Given this scenario, the more rapidly you can get your acquisition opportunity in front of the viable buyers, the better your chance for more favorable sale terms and conditions.
All systems go, right? But wait. We have a major proposal out to that Blue Chip account and when we get that deal our sale price will sky rocket. So we are just going to wait for that deal to close and then put our company up for sale.
Let me give you a gem here. We will call it the Moving Sales Pipeline Theorem. It states the sales pipeline always moves to the right. This is based on over 20 years in sales and sales management experience and many years of selling companies with sales pipelines. The sales either take much longer than projected or do not materialize at all.
Given this, the time critical nature of your pending business sale, and your desire to ring the bell from your Blue Chip account deal, what do you do?
You engage a great M&A firm that specializes in selling similar companies (I know of one if you are interested) to sell your business. Let them focus on selling your business and you focus on running your business and closing that big sale. Get several buyers interested and negotiate for your best deal. There will be a lot of give and take here. At the right moment, as a counter to one of the buyer’s points, you ask for a 6-month window post acquisition to close that deal. You then ask, for example, for an earn out incentive of 30% of the contracted first year revenues of the Blue Chip account deal as “additional transaction value” payable 30 days after the one year purchase anniversary date.
There are lots of moving parts here so let me elaborate. The first element is you do not delay your business sale process. We already established that it was time critical. Secondly, I very carefully chose the language “additional transaction value”. We want to make sure that this payment is not confused with ordinary income at double the long term capital gains tax rate. Third, you have a way better chance of closing the big Blue Chip account as a division of G. E., for example, than as XYZ Manufacturing, Inc. Finally, what a great way to kick off a relationship than a big collaborative sales win that makes the buyer look really smart. Your earn out check will be the most enjoyable payment they can make.
Dave Kauppi is the editor of The Exit Strategist Newsletter and a Merger and Acquisition Advisor and President with MidMarket Capital, Inc. MMC is a private investment banking, merger & acquisition firm specializing in providing corporate finance and intermediary services to entrepreneurs and middle market corporate clients in information technology, software, high tech, and a variety of industries. Dave began his Merger and Acquisition practice after a twenty-year career within the information technology industry. His varied background includes positions in hardware sales, IT Services (IBM’s Service Bureau Corp. and Comdisco Disaster Recovery), Software Sales, computer leasing, datacom, and Internet. The firm counsels clients in the areas of merger and acquisition and divestitures, achieving strategic value, deal structure and terms, competitive negotiations, and “smart equity” capital raises. Dave is a Certified Business Intermediary (CBI), is a registered financial services advisor representative and securities agent with a Series 63 license. Dave graduated with a degree in finance from the Wharton School of Business, University of Pennsylvania. For more information or a free consultation please contact Dave Kauppi at (630) 325-0123, email davekauppi@midmarkcap.com or visit our Web page http://www.midmarkcap.com