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The Acquisition Entrepreneur | Built to Sell

Whoever buys your company is probably going to borrow some of the money. As a seller, it’s important to understand where they plan to get the money from.

You may be saying to yourself, “Why do I care where they plan to get the cash? That’s not my problem.” 

Beyond the psychic reward of seeing your business thrive under new ownership, there are some practical reasons to care about how your potential acquirer plans to finance your deal:

  1. If you roll more than 20% of your equity, you could be on the hook (personally) for the debt.

In the United States, many small business transactions are made possible because a bank lends the money to an acquirer under the condition that the federal government will repay the bank if the loan goes bad. (The U.K., Canada, and Australia have similar programs.) These Small Business Administration (SBA) loans lubricate the market for smaller companies, but they come with a potential catch for the seller. If you roll more than 20% of your equity into a minority ownership position in a business that has received an SBA loan, you may have to sign a personal guarantee with the bank for the debt your acquirer plans to take on.

2. If you roll equity, it could go to zero if the acquirer uses too much debt.

Last week we covered the story of Mark Ferrier, who rolled a portion of his sale proceeds into a new entity set up by the private equity group that bought his company. After the acquiring company defaulted on a series of balloon payments to its lender, Mark’s equity gave up 96% of its value, leaving Mark with just four cents for every dollar of equity he had rolled.

3. The bank gets paid back first.

Regardless of whether you decide to roll equity, it’s likely you will be asked to finance some of the deal in the form of “seller financing.” This loan to your acquirer can provide you with a tax-efficient annuity stream for a few years after selling, but if your business struggles in the hands of your acquirer and can’t afford to pay back its debt, the senior debt holder (i.e., the bank) is entitled to get paid back before your seller note is addressed. If there’s nothing left over after the bank gets its money, you may be out of luck.

4. Deals fall apart when acquirers can’t get financing.

This week we dropped another edition of Inside the Mind of an Acquirer, featuring Baraki Akil, who teaches acquisition entrepreneurship at Cornell. While Akari has successfully acquired two $30 million businesses, he revealed his biggest heartbreak remains a label printing company he tried, but failed, to acquire. Bakari had signed an LOI with the founder when his lender started asking questions during the diligence process. The bank’s hesitation slowed the deal down to the point where Bakari felt obligated to waive the no-shop clause in the LOI, and the seller decided to sell their business to a competitor instead. 

In this clip, Bakari describes how the deal for the label company fell apart when his banker started asking questions.

5. You can’t get blood from a stone.

Many of the brand-name MBA programs are now teaching “acquisition entrepreneurship,” and they are minting an army of young, inexperienced managers determined to buy a business. A bank lending to a first-time acquisition entrepreneur will most likely ask the young graduate for a personal guarantee, but with little more than student debt on their personal balance sheet, there’s not much the bank can go after. This means some acquisition entrepreneurs use too much leverage, putting your business in peril under their leadership. After all, as the lyrics from the old Bob Dylan song go, “When you ain’t got nothin’, you got nothin’ to lose.” If you’re still involved in your business as a lender to the acquirer or minority equity holder, you could end up wishing you had sold to someone with a little gray hair.

📣 Quote of the Week

“How am I supposed to afford that?”

–  The first question Cornell MBA candidates ask Bakari when he proposes they buy a business instead of starting one. Bakari goes on to explain how they can borrow money from a bank, friends, and the seller themselves. 

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  • Viewgol, a company specializing in outpatient billing management analytics and services, has been acquired by CPSI, a community healthcare solutions provider. The acquisition deal was settled for $36 million in cash. Additionally, if Viewgol meets specific profit targets in 2024, they stand to receive a bonus (earn out) of up to $31.5 million. Viewgol is expected to generate an Adjusted EBITDA of approximately $4.5 million in 2024, meaning CPSI is paying roughly 15 times Adjusted EBITDA for Viewgol.

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