Tuesday, July 26, 2016

Business Sale Negotiation - Our Most Unusual Deal Term

The deal process is very stressful so every once in a while it is refreshing when we can break the tension with a good laugh. In retelling this story I am changing the names to honor the privacy of our clients and buyers. So let me set the stage. We have negotiated and have received a dual signed letter of intent between our client, a privately held healthcare information technology company and a much larger publicly traded company. We are ending due diligence and have had some very stressful discussions regarding the future role , title, salary and duties of our founder/seller. We were able to come to agreement and had started the process of crafting the definitive purchase agreement. So the basic economics of the deal are set, but just need to be memorialized in a formal contract.
I get a call from our client, let's call her Sarah. She says that she is going to fax me over a document and after I read it, to call her back. A minute later the fax starts to print out a page from the buyer's annual report where they identify the price and terms of another acquisition they had completed during the reporting period. I recognized the company because Sarah and I had discussed it before and she had shared that the company was similar to hers in terms of product offering and revenues. In my mind I had formulated a potential transaction range for this very similar company. 
We had been able to negotiate what we felt was a very favorable deal for our client, well beyond a typical EBITDA financial buyer valuation.  Because it had strategic value to a couple of the major players in the space and we had them both competing for the acquisition, we were being valued at a multiple of revenue not a multiple of EBITDA.
Back to the fax. I start reading the deal terms being described about this very similar company and the valuation was significantly above our lucrative offer. I call up Sarah and the first thing she says to me is, "I want Becky's deal." Becky was the owner of the other acquired company and she and Sarah were professionally acquainted.  Being the cool-headed deal guy that I am, I stammered, "Sarah, I looked at this deal and there is no way I can justify the price that the buyer paid for them."  She said to me, "Didn't I tell you that Becky was having an affair with the buying company's previous CEO?"
OK now is my time to actually be cool-headed. I said, "Well Sarah, are you prepared to come up with that deliverable, and how will your husband feel about that deal term?" Silence followed for what seemed like an eternity.  Soon the silence was broken with a very loud and hearty belly laugh from the other end of the phone.  Finally she said, "OK, OK, I get it. Let's get my deal done."
Whew, I dodged a bullet there and even got a funny story out of it. It was not funny until the substantial wire transfer had hit Sarah's bank account.

Dave Kauppi is a Merger and Acquisition Advisor and Managing Director of MidMarket Capital, providing business broker and investment banking services to owners in the sale of information technology companies. To learn more about our services for technology business sellers click to visit our Web Site MidMarket Capital

No comments:

Post a Comment