We recently ran a webinar where we discussed deal disasters. I shared the following story involving a European company that wanted sell off a subsidiary.
Scene: its right after the dot.com era ended, 2002. A corporate CEO desires to sell off a non-core IT services asset. They own 51%. The management, holding 49%, welcomed the idea and was interested in a parent with a stronger strategic fit.
A process is run, the perfect buyer was found, a deal agreed to and an LOI signed. The total consideration was 10 million. The buyer agreed to pay 60% in cash, amounting to 6 times PBT, and to top off the deal to the targeted price, an earn out of 4 million. So, 6 million at close plus up to 4 million over the next 2 years contingent upon performance.
AFTER signing the LOI, the corporate CEO said, Well, we wont have anything to do with the future (hence, the earn out), so well take our 51% from the cash at close. They wanted 5.1m of cash at closing and to leave the management with 900K at closing plus ALL of the earn out.
Obviously, not only did this not feel fair to the management, it WAS unfair. After weeks of internal discussions with minimal movement on the corporate sellers side, the deal broke down. You can call this seller conflict, you can call it greed on the part of the parents CEO, or just plain stupid. Whatever you call it, it was a deal disaster.
Epilogue: The subsidiary has not been sold since. The employee/management are unhappy, many left and the unit produced losses of over 1 million last year.