Many of the posts on this site involve discussions about selling a business. The last few posts have been about selling a business unit that is part of a larger company. A divestiture. Selling a business and divestitures have both similarities and differences. But maybe more similarities than differences. Here are some common pitfalls that apply to both. Not being familiar with the process. Senior managers and equity stakeholders may not recognize the amount of work required to conduct a successful sale or divestiture. The tone for the project must be set early on and those managing the project need…
Author: Gregory Pearl
Business Unit Divestiture Deal Structure: Whatever It Takes
When a company is looking to divest one of its units, the best acquirer is a strategic buyer with lots of cash. Wait, that seems to be a terrific buyer for almost any type of business! There are other alternatives, of course. Each approach has its positives and negatives. Private equity firms are often good places to shop a business that is for sale. Assuming that business is large enough and without too many problems. Private equity firms tend to be more demanding in what they are buying than strategic industry buyers. They are more demanding in their due diligence.…
Sellers Should Not Fear The Earn-out
It is no great insight that acquirers of companies want to only pay for an acquisition based on today’s earnings and book value. However, Sellers want to sell their company based on tomorrow’s expected earnings. Public companies have the advantage of being able to offer their publicly traded stock as currency in an acquisition. Private companies are not so lucky to have stock to use, their tactic to “pay up” for an acquisition often is the Earn-Out. According to James W. Bradley, co-author of Acquisition and Corporate Development: “The earn-out is a contingent purchase which allows some deals to go…
Business Unit Divestitures: Unpleasant But Often Necessary
It is common for larger companies to divest units that are underperforming or otherwise do not meet strategic goals. This practice is likely to increase. Whether the M&A market is hot or not, divestitures are a challenging activity requiring strong support from equity stakeholders and management. The divestiture activity should not be treated as an inferior activity to acquisitions. Divestitures have its own set of challenges. Confidentiality needs to be maintained and this may harm both the seller and the buyer. The selling company may not adequately understand what is going on in the unit being sold. For the seller,…
How Much Is That Investment Worth?
An individual made a $28,000 investment into an oil and gas company. The majority shareholder was a childhood friend. Ten years later, the company offered to buy out the investor’s approximately 6% ownership in the company for $6.5 million. The investor accepted the offer and thought he made a phenomenal return. But things are not always as they seem. Two years later, the company was sold for $2.6 billion. Of course, the investor sued for fraud during the time the offer was extended and accepted. A jury found in favor of the investor with a judgment for the investor of…
After The Sale: Post-Closing Issues
The seller of a business may think the closing is the end, and that they have no more responsibilities. Ignoring the issue of seller financing, they may think that is the case. However, the closing does not signal the end of the seller’s responsibilities. There are a whole bunch of things that must be settled in the months following the signing. The most important point is that the contracts and other deal documents must be carefully worded to avoid misunderstandings to avoid later litigation. One investment banker has said, “you start negotiating post-closing adjustments on day one.” Here are some…
Mergers & Acquisition Trends as of Feb 2022 for 2021 Q4
Alteris LLC tracks Mergers & Acquisitions (M&A) valuation and other trends/metrics from its various partners and research sources. We will periodically report on what we find here. For more detailed information on valuations and M&A trends contact us directly. Please note that this information is a summary, generalized for many different types of companies of various sizes. This data is collected from various sources and includes proprietary deal information from over 200 PEGs (Private Equity Groups) on $10-250mm sponsored transactions, with an average TEV near $50mm. The information is available as of February 2022 and covers the fourth quarter of…