We've been getting lots of questions lately about what deal structures are looking like right now post-COVID. At Corum's Tech M&A boot camp, Selling Up Selling Out, we preach that structure is more important than price. Here are two recent offers with the same company this summer that reflect this. See what you think.

Case Study #1: Structure vs. Price

The first offer from what our client thought would be the logical buyer came in "highly structured" as we call it, meaning there were a number of non-cash components. The second offer came from a private equity firm we know well, one unknown to our client. The firm's valuation is about $12M, so the seller was happy with the results of the global search process that we took him through. He had some offers from buyers we know are bottom feeders for less than $10M in value. They'd been trying to lock him up into exclusive negotiations. Don't do that.

There were other offers as well, but these were the two best. On the first offer, as you can see, the price is good, $20M. But most of the payment is in the future. There's $5M down with two additional payments of $5M each at the end of year one and at the end of year two. The first $5M is guaranteed. It's a debt note. The second $5M payment is not a guaranteed note and has the basic contingency of the company meeting some liquidity requirements assuming the business does not dramatically drop off.

There is an additional upside of our four years of $5 million bonus based on agreed-upon high goals, tied to an extended employment agreement of four years with a five-year non-compete agreement. There are no provisions for employees. 

The second offer is only $15M, but it's all cash with a 10% one year escrow for contingencies, meaning that the owner pockets $13.5M at closing, the rest $1.5M within a year, if escrow contingencies are met. And usually, they are. The employment agreement is two years with a non-compete agreement, and a large severance bonus for any employees let go.

So, which offer would you take? 

There was a time not long ago when you would have looked carefully at the higher offer believing that the liquidity and earn-outs were very doable, but with today's much riskier environment, a recession is unclear. Worst case, you might only receive $10M for your company. Plus, most people would tend towards the sure thing – the $15M offer. It's a better structure for today's environment with a shorter period that you would be required to stay with the company and nice provisions for employees.

There's been a lot of work to get to this point, with lesser bidders that have dropped out. It's decision time. At this point, a logical counter to buyer number one is to have them make the $20M offer into all cash, with shorter employment agreements and some protection for employees. The components of structure haven't changed over the years. You can expect to get more from the buyer if you're willing to share the risk. In other words, a buyer can afford to pay you the greatest price if the transaction is all earn-out, essentially payment in the future based on performance meeting some agreed-upon goals. If you want all cash, then the price will naturally be lower.

When COVID hit, no one knew what the effects would be. At that time, Corum had a quarter of a billion in transactions in the works. Many offers were cash. 

Case Study #2: Deal Shifts Before and After COVID

Now, here's an extreme example to show you how one deal shifted before and after COVID in the matter of a couple of months. 

In January 2020, we had an offer for a client in the IoT space from a strategic buyer of $9M at closing with $6.5M upside earn-out for management over three years, a $15.5M deal. That's very good as it's a small company.

In March, when the effects of COVID were starting to hit home, the buyer withdrew the offer thinking the seller had panicked. He changed the deal, what we call "re-trading". The new offer was zero cash at closing and $11M over three years tied to EBITDA. We were concerned as his representative. Corum is unique in the industry as we don't have a requirement that you must accept any offers, nor do we have a minimum. Our contract treats us like a shareholder with the same risk. We get paid as you get paid in the same forum. So, if you get all earn-out, we get paid earn-out when you receive it. With this situation, we were concerned. We advised the client to turn down the offer, and they did. We found a better buyer.

Things have normalized since the initial COVID wave, especially after the stock market recovered. Further, demand from buyers is still very strong because of the massive amount of capital available. Private equity firms are still sitting on over $3T in dry powder, with a mandate from limited partners to commit these funds. In fact, there are private equity firms raising some very large new funds. Strategic buyers are flushed for cash as well, with over $1T to invest.

As the most active firm in the tech M&A world, we speak with all buyers regularly, and they still have the strategic imperative to buy to stay competitive. The disruptive tech trends are stronger than ever. If you don't know which ones those are, the ones you should be mapping to, be sure to go to Corum's website to review the 2020 Top 10 Disruptive Tech Trends.

Case Study #3: Changes in Variability – Price & Structure

Let's take a look at an example of how things have changed in both price and structure. This example is an international company with revenues just under $3M. There were three serious buyers that we focused on. The first bidder was a strategic tech company. The second bidder was a major PE firm in North America, pushing for a bolt-on deal with one of their portfolio companies. The third bidder was a smaller PE firm that wanted to make a platform play and build around it, so they were willing to pay more. Eventually, this third firm would become the top bidder. Here's what happened. 

During the first round of offers, the strategic bidder offered $12M in cash upfront. The larger PE firm offered $12M, but instead half cash/half earn-out. The third bidder, the smaller PE firm, made an initial offer in the low teens. We went back to all of them and pushed for more. In the second round, the first buyer, the strategic firm, dropped out. We got the second bidder up to a $28M offer, half cash/half earn-out with some stock considerations thrown in. The third bidder, the smaller PE firm, provided a written offer for just about the same: $28M plus with cash rollover and earn-out.

We went back again, the third bidder, the smaller PE, came back at $52 million with cash, rollover equity, earn-out, and a seller's note as part of the structure. The second bidder, the large PE firm, couldn't match it. So, our client signed the LOI with the third bidder. 

So, where does that leave us? 

Buyers are active, and we have a record number of companies in LOI. Tech is still the place to be. Private equity needs bolt-ons like never before. No one knows how deep or wide the recession will be, what valuations will be like when we get done. The range of deals is much wider, both in price and variability.

More than ever, you need to go through a global partner search process to create buyer tension, sort out the real bidders, and create an auction environment that will get you the optimal outcome. 

Second, you didn't leave the building of your company up to chance, did you? It took focus and hard work. The same applies to selling your company. After all, it's the most important transaction of your life. Take control of the process so you have multiple options and are not at the mercy of one bidder.

Finally, don't miss the window. The buyers want healthy companies. Don't let your company suffer; it'll be tough to sell for a good price, let alone the appropriate structure.