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The 2nd Most Important Number on an LOI

This week we dropped an interview with Josh Anhalt, who tried to sell his business three times before finally successfully getting seven times earnings for GreenPath Energy, a business that helped oil companies find leaks in their pipes.

One of the sticking points in all three failed deals was Josh’s retained earnings. Over the years, Josh had left his profits in his company’s bank accounts, eventually accumulating a multi-million-dollar nest egg.

Leaving his retained earnings inside his business sheltered the cash from tax and meant Josh had a rainy day fund, but when he went to sell, the acquirers considered the money as “working capital” and insisted that the money remain in the company when Josh handed over the keys.

Josh estimated his company only needed a few hundred thousand dollars of working capital to juggle the natural ebb and flow of a service business, yet he had more than two million dollars in his company accounts. Josh considered the money his. All three prospective acquirers considered Josh’s retained earnings an asset of the company they were offering to buy and insisted the treasure chest go with the company, which is one reason all three deals collapsed.

After your offer, the second most important number on your Letter of Intent (LOI) will be the working capital calculation the acquirer is proposing to use. This details how much cash needs to be left in the company on closing day. If you’re in the habit of keeping a lot of unnecessary cash in your company, expect an acquirer to argue that money should come with the business.

Get clear and comfortable with how the acquirer is proposing to deal with working capital before you sign an LOI.

💬 Quote of the Week

“You don’t need two and a half million dollars sitting in the bank account.”

– Josh Anhalt explaining to a prospective acquirer why he should be entitled to the retained earnings of his company

🎬 Clip of the Week

In this video, Josh discusses the significance of meticulously preparing your data room and the essential information to present to potential buyers to achieve a premium valuation for your business.

🏆 Elegance on Wheels

Just three weeks after selling his company, Josh indulged in a BMW M340, marking the first new car he’s ever bought solely for his own enjoyment.

📈 Deals

  • Mountz, Inc., makes tools and equipment used to control how tightly nuts, bolts, and other threaded fasteners are tightened. With an estimated annual revenue of $15 million, Mountz has been acquired by Snap-on Inc. for $40 million in cash, indicating a valuation multiple of approximately 2.67 times Mountz’s annual revenue. This acquisition is poised to augment Snap-on’s torque solution portfolio for customers in industries such as aerospace, transportation, and advanced manufacturing.
  • D2C Media Inc., is a digital marketing agency that helps car dealerships advertise and sell their vehicles online. They create websites, online ads, and use various digital tools and strategies to attract people who are looking to buy a car, and then connect those potential buyers with dealerships. D2C has been acquired by audience-driven technology company Inc. The acquisition, completed on November 1, 2023, involved a cash payment of CAD $105 million (USD $76 million) from, utilizing its cash reserves and credit lines. Moreover, may pay up to an extra CAD $35 million (about USD $25 million) if D2C meets specific financial targets post-acquisition.
  • Ault Industries Inc., a Canadian equipment distributor that sells and rents large machines used in construction, mining, and other industries, has been purchased by Alta Equipment Group Inc., an NYSE-listed company. In the last twelve months up to June 30, 2023, Ault achieved $50.3 million in revenue and an adjusted EBITDA of $7.5 million. The acquisition was for a total of $36 million, comprising $23.2 million in cash, a $2.2 million seller note, and Alta common stock valued at $10.6 million, issued at $13 per share. This equates to 818,473 shares distributed over five years. The deal implies a valuation multiple of approximately 4.8 times adjusted EBITDA. This acquisition is expected to immediately enhance Alta’s earnings, profitability, and free cash flow.

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