Let me outline what I consider a real dilemma. Consider selling an IT BPO company in the US, and the two most logical suspects are international companies. One is Indian, the other is Chinese. Both value the company at $20m US, expect to be public in the next 12mo, both expect the seller to continue on with an earn out over the next 12-24mo and both want the seller to take up to 25% of the total consideration in stock. Let's see, you give up control, you get 33-50%of the total value in cash, which is good, and then need to deliver numbers to get your balance of cash, and end up with a minority position in a private company in a another continent. Sounds like a story you read about, but in many cases, with the buyers being non-US, this is the world sellers are in, and you know what, this creates really good opportunities to get liquid, and, creates meaningful upside.
Do you know what is relevant in the above example? It is not so much what our client may be worth, but what is the real value of the buyers shares. In this case, since you theoretically know what your business can deliver, history, pipeline, management authority, the variable is the buyer. Therefore, we are buying stock in the buyer.
In this context, things are clearer and you can see your leverage points. With an earn out of approx 1/3 cash, 1/3 earn out, and 1/3 stock, the decision to select which shares to buy is the difference in this example of getting $18m or $29m, when all the variables were the same. Except in one case, the shares were worth 66% of par in 24mo, and the other 300% of par in the same period.
marty