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Previously on "Someone's offered to buy my company; how to value it?"
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Hi 'financial analyst', many thanks for your excellent points.
I've no pressing desire to sell and be subsumed by the purchasing company; however £££ talks and it all depends how much they are prepared to pay. Good point about not needing to sell the whole company, instead selling them a minority shareholding with obligations on my side re the service I then provide them. I definitely need a good lawyer and accountant to go through matters first as you've said.
My next meeting with them is in just a over a week's time, along with their accountants. Let's see what they've got on the table.
Thank you again.
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A couple of thoughts from a newbie:
There are a lot of question-marks on this and I think you need to anticipate exactly what they want and decide exactly what you want before considering the sale of the company further.
Why do they want to buy?
- to use your balance sheet? (cash probably)
- to gain control over you or your/their Intellectual Property?
- to invest to build your company into something bigger?
Why would you want to sell?
- to retire?
- to change job/lifestyle?
Not much point in selling the company but continuing to do the same work under onerous non-compete clauses & multi-year payouts / clawbacks.
Also, check your tax position carefully - it can be advantageous to sell if structured correctly. Also, if you do sell, consider your pension position regarding current & future contributions and treatment of the sales proceeds.
If they just want you to work for them, it would be much more straightforward to simply offer you a job, or to change your existing service contract.
My guess is that in the absence of significant 'strategic value' they will offer much less than you will want for it as a going concern - probably two or three times NPBT, plus cash in the bank.
Remember that you don't have to sell the whole company. It may suit both you and them for them to buy a minority shareholding, but with a tighter agreement on your obligations to the company and indirectly to them.
Either way, run anything past your accountant & solicitor before signing.
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Originally posted by Dominic Connor View PostA big issue here will be your work for the company afterwards.
It is far from unknown for the takeover to be for assets/goodwill/IP of the company and for the founders to be made redundant quickly after, perhaps with a clause in the contracts that stops them doing "competitive" work.
Conversely, they may want to lock you in, with financial penalties if you quit and again an non compete clause.
Lastly there is the earn out, they may be buying your company because they reckon it will make £X over the next few years and there may be clawbacks or deferred payment to cover this. That has the obvious risk that it may not perform and also that transfer pricing may mean that they can engineer it so that the profits go elsewhere, so they don't pay you.
I'll certainly check for lock-in clauses, and deferred payments. Not sure how I can ensure at the outset that I don't get caught out by them engineering it so the profits go elsewhere making the performance look worse than it actually is?
Originally posted by LisaContractorUmbrella View PostIf your company is starting to make real money and you have brand recognition at a point where another company wants to acquire that brand why would you want to sell?Originally posted by yasockie View PostMore money sooner, possibly less work?
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Originally posted by yasockie View PostMore money sooner, possibly less work?
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If your company is starting to make real money and you have brand recognition at a point where another company wants to acquire that brand why would you want to sell?
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Being shafted
A big issue here will be your work for the company afterwards.
It is far from unknown for the takeover to be for assets/goodwill/IP of the company and for the founders to be made redundant quickly after, perhaps with a clause in the contracts that stops them doing "competitive" work.
Conversely, they may want to lock you in, with financial penalties if you quit and again an non compete clause.
Lastly there is the earn out, they may be buying your company because they reckon it will make £X over the next few years and there may be clawbacks or deferred payment to cover this. That has the obvious risk that it may not perform and also that transfer pricing may mean that they can engineer it so that the profits go elsewhere, so they don't pay you.
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Thank you, most useful.
Originally posted by northernladuk View PostSomething doesn't sound right here. Why would they want to purchase a company that isn't really a company? I take it they are aware there is only you that comes with it so you are the only asset?
What type of company is your client? Small to medium sized owned by a single entrepreneur type who has a habit of buying smaller companies? If so I would be very nervous about them having a card up their sleeve and turning you over at a later date.
I would be getting some very good legal advice on this if you are going to do it. Sounds like a lot of smoke and mirrors just to get you to work for them IMO.
Originally posted by Scruff View PostAs a further thought here...
YourCompany (if you are a typical IT Service Company) will have as its largest asset, its Cash at Bank. If another company then comes along and offers to purchase YourCompany, if they are going to pay you in Cash in one lump sum, then subtract the Cash at Bank figure from the Purchase Price. If they are going to pay you by any other means (shares in TheirCompany, deferred cash, debentures or any non-cash related means), then they are effectively using YourCompany's cash and paying you with non-cash related "assets" of dubious (future) value. This is an old accountant's / financial manager's trick and which caught out Umpteen IT Start-ups in the early 2000's - "I have just sold my ITCompany for £5m (and have been paid in shares which I have used to wallpaper my loo)"...
Thanks once again.
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As a further thought here...
YourCompany (if you are a typical IT Service Company) will have as its largest asset, its Cash at Bank. If another company then comes along and offers to purchase YourCompany, if they are going to pay you in Cash in one lump sum, then subtract the Cash at Bank figure from the Purchase Price. If they are going to pay you by any other means (shares in TheirCompany, deferred cash, debentures or any non-cash related means), then they are effectively using YourCompany's cash and paying you with non-cash related "assets" of dubious (future) value. This is an old accountant's / financial manager's trick and which caught out Umpteen IT Start-ups in the early 2000's - "I have just sold my ITCompany for £5m (and have been paid in shares which I have used to wallpaper my loo)"...
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Originally posted by jamesbrown View PostHave to agree that it sounds odd unless you own the IP on something they want, such as a method or a tool. I can't see a company paying 14 times average earnings as a gesture of goodwill - where's the business sense in that? Either you own something they want or they're presumably talking about a relatively small golden hello as a gesture of goodwill for your personal service in future(?)
There'd be nothing to stop them paying £Xk for your shares in the company, you then leave it and set up a new company. Why would they offer to buy a company where presumably the only asset is a highly mobile one that's outside their control (ie you)?!
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Have to agree that it sounds odd unless you own the IP on something they want, such as a method or a tool. I can't see a company paying 14 times average earnings as a gesture of goodwill - where's the business sense in that? Either you own something they want or they're presumably talking about a relatively small golden hello as a gesture of goodwill for your personal service in future(?)
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Something doesn't sound right here. Why would they want to purchase a company that isn't really a company? I take it they are aware there is only you that comes with it so you are the only asset?
What type of company is your client? Small to medium sized owned by a single entrepreneur type who has a habit of buying smaller companies? If so I would be very nervous about them having a card up their sleeve and turning you over at a later date.
I would be getting some very good legal advice on this if you are going to do it. Sounds like a lot of smoke and mirrors just to get you to work for them IMO.
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Average company profits for a year x 4 to 6 (depending on how good a negotiator you are).
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Originally posted by 1865 View PostEven if I did go for the 'signing bonus' route how would I work out what that should reasonably be?! I don't really want to pick a figure out of the air. What I didn't mention (and should have) is that they want to keep my company name and website as it has quite good brand recognition in the sector we both work in
Good luck,
Boo
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