In this week’s edition of Built to Sell News, we are covering the pros and cons of the three most frequently offered forms of consideration by an acquirer:
- Cash at closing
- Equity Roll Over
- Earn-out
Also, this week…
- How to leverage a “put option” to cover your downside
- Why long earn-outs don’t work
- A mini roll-up
There’s a well-known saying in the world of mergers and acquisitions: ‘You set the price, I’ll set the terms.’ This implies that sellers are primarily concerned with the headline sale price, while experienced acquirers understand that they can reduce the real value of that price through shrewd deal terms.
This week, we sat down to talk deal structure with Randy Woods in the latest installment of our Inside The Mind of An Acquirer series on Built to Sell Radio. Woods, who previously sold his 120-employee company to Valtech in 2017, now operates on the acquisition side, assisting his former acquirer in identifying potential companies for purchase. Our discussion shed light on three of the most common forms of consideration that an acquirer might offer you:
- Cash at Closing
Most acquisition bids will place a value on your company and offer a percentage of that in cash, with the remaining amount structured as an equity roll over or earn-out.
As Woods described during the interview, Valtech typically pays cash for the majority of a business and asks owners to roll a portion of their proceeds — usually between 10% – 20% of the deal– into shares of Valtech.
- Equity Roll Over
These days, most deals require that you roll some of your proceeds into equity in either the acquiring company, or a new company the lawyers set up to own your business after you sell it (common when a private equity group buys a majority interest in your business).
If you’re going to roll some equity, it’s important to understand the liquidity of those shares. If your acquirer is a privately held company, this can be tricky because there is no open market to sell your shares into, which is one reason the equity Ryan Moran rolled when he sold Sheer Strength in 2017 went to zero.
When Woods sold his company, he arranged for a “put option”, granting him the right to sell the 40% of his consideration he took in shares back to Valtech at the same valuation at which he sold his initial share tranche. If he opted to retain the Valtech shares, he could potentially benefit from the appreciation of Valtech’s stock when the company is either sold or goes public. This structure provided him with a safety net for his downside while still offering the potential for upside gain. Recent Built to Sell Radio guest Tyler Smith the founder of Skyslope, used a similar structure in his deal.
- Earn Out
An earn-out offers you the possibility of future payment(s) for hitting goals you agree to strive for post-acquisition. While earn-outs can work to bridge the gap between what you want for your business and what someone is willing to pay, we’ve also covered lots of horror stories, like when Rod Drury walked away with nothing from a $20 million earn-out.
During our interview, Woods described many of the challenges with an earn-out. Chief among them, an earn-out often pits you against your acquirer in a competition for resources. That’s why Valtech keeps earn-outs to just 6-18 months (the average earn-out is 3 years) and ties payments to the revenue, which they find leads to fewer disputes.
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📽️ Clip of the Week
In this clip, Woods shares how his strategic use of a “put option” during his company’s sale to Valtech provided a safety net while preserving potential upside gain from stock appreciation in the event of a future sale or public offering.
📣 Quote of the Week
” The challenge with having a long earn-out is that you misalign on incentives.”
– Woods explains Valtech’s preference for keeping earn-out periods short when acquiring a company.
📈 Recent Deals
- Bluegrass Vascular Technologies, Inc. recently sold the Surfacer® Inside-Out® Access Catheter System to Healthcare technology leader Merit Medical Systems, Inc. for a total cash consideration of $32.5 million, as announced by Merit.
- Merit also acquired a portfolio of dialysis catheter products and the BioSentry® Biopsy Tract Sealant System from AngioDynamics, Inc. for a total of $100 million.
- NaaS Technology’s subsidiary, Dada Auto, will acquire 89.99% of Sinopower Holdings International from an existing shareholder for approximately USD 6.1 million in cash, as announced by the Chinese EV charging company.
Do you have a connection with a founder who recently sold their business and has a story worth sharing? If so, we’d love for you to nominate them.
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This Week’s Contributors
Colin Morgan, Executive Producer of Built to Sell Radio, John Warrillow, Host of Built to Sell Radio, Daphne Parsekian, Copy Editor, and Denis Labataglia, Audio Engineer.
