Capittal's view: I have two offers for my company, how do I know which is better?

Quick answer

Capittal's view is that the headline price is not comparable between two offers: the only comparable figure is the net cash you receive on completion day. The offer that pays more usually pays more only if everything goes well, and it places the difference in earn-out, escrow and deferred payments that depend on the buyer. Compare the two offers in a two-column table, certain cash and conditional cash, and adjust the second column for probability of payment and for the years you will have to keep working. An offer of 12 million with half conditional can leave you less than one of 10 million paid in full at closing.

Why are two offers with the same price not worth the same?

An offer's headline is an enterprise value. It is not the money that lands in your account.

Between that number and your account there is a chain of deductions and conditions: financial debt netted off, the working capital adjustment, the escrow holdback, the portion tied to future results, the loan you grant the buyer, transaction fees and tax. Each offer splits that chain differently.

There is a second difference almost nobody compares: time and control. A euro received on completion day is yours. A euro you will receive in three years if the company hits an EBITDA target is not a euro: it is a possibility, and it depends on decisions you no longer take.

So the only honest comparison is a table with two columns per offer.

• Certain cash. The amount transferred on completion day that is subject to no later condition.
• Conditional cash. Everything else: escrow, earn-out, deferred payments, vendor loan and any price paid in the buyer's own shares.

Rank the two offers by the first column before discussing the second. That order changes the decision in most cases.

What is deducted from the headline price before I get paid?

Seven deductions separate the headline from what you bank. Ask each buyer to quantify all seven in their own offer.

• Net financial debt. If the offer is an enterprise value, debt less cash is deducted from the price. Insist that the offer states what it treats as debt: leasing, recourse factoring, ICO loans from Spain's state credit institute, shareholder loans, and dividends approved but unpaid.
• Working capital adjustment. The buyer sets a normalised target working capital and compares it euro for euro against the actual figure at closing. A badly calculated target eats hundreds of thousands of euros without anyone touching the headline.
• Escrow or holdback. Part of the price is deposited to back the warranties in the contract for a set period. It is not price received: it is price on hold.
• Earn-out. The payment conditional on the company hitting targets after closing. Define the metric: revenue, EBITDA or margin. Revenue is the hardest figure to manipulate; EBITDA is the easiest.
• Vendor loan. You finance part of the price yourself. Check the interest rate, the repayment schedule, and whether your claim ranks behind the bank funding the acquisition.
• Transaction fees. Financial adviser, lawyers, tax adviser and vendor due diligence. They come out of your pocket, not the buyer's.
• Tax. If you sell as an individual, the gain on the sale of shares is taxed in the savings tax base of Spain's personal income tax (IRPF). The holding structure and the payment schedule change your net proceeds, and that is decided before signing, not afterwards.

How do I apply probability and a discount to the conditional price?

Conditional price is worth neither zero nor its face value. It is worth its face value multiplied by the probability of receiving it and brought back to today's value.

Do it in writing, in three steps, for every conditional tranche.

• Probability. Is the target met by the plan you already have, or does it demand growth you have never delivered? If the earn-out target sits above your best historical year, the probability is not high.
• Control. Who decides the variables that move the metric? If the buyer can allocate group costs, change prices or halt commercial investment, your probability falls even when the business performs.
• Time discount. Apply a rate for the years you wait to be paid. Use what you would do with that money today as your reference, not a textbook rate.

A hypothetical example to see the mechanism. Offer A pays 10 million, all at closing. Offer B pays 12 million: 7 at closing, 1 in escrow over two years and 4 of earn-out over three years. If you assign a 90% probability to the escrow and 60% to the earn-out, offer B is worth 7 + 0.9 + 2.4, around 10.3 million before discounting for time, and less than that in today's value. The headline said 12, the real difference is marginal, and three years of work and risk are inside it.

What matters besides the money when comparing two offers?

Four factors never appear in the figure and they decide deals.

• Required stay-on. An offer with an earn-out obliges you to keep running the company, normally for two or three years. That time has a price and it must be deducted from the gap between the two offers.
• Who is buying. A trade competitor, a private equity fund, a family office and a search fund bring different demands on stay-on, information and reinvestment. The buyer type almost always explains why one headline is higher.
• Execution risk. Ask whether the deal is approved by their investment committee and whether bank financing is committed. Ask for the due diligence timetable, the conditions precedent and their record of deals closed and deals abandoned.
• Warranties in the contract. Liability cap, survival period for the warranties, de minimis thresholds and warranty and indemnity insurance. An offer with a cap of 30% of the price and three years of exposure is more expensive than one with 10% and eighteen months.

The cost of those terms can be estimated in euros. Estimate it and add it to the table.

What should I ask each buyer before deciding?

Send the same list to both, in writing, and compare answers rather than speeches.

• Exactly how much is transferred on completion day?
• What definition of net debt do you use, and what normalised target working capital, with what figures?
• How much sits in escrow, for how many months, and in which cases is it released?
• Which metric is the earn-out calculated on, who calculates it, who audits it and how is a dispute resolved?
• Which decisions can I still take during the earn-out period, and up to what amount in euros?
• Is the earn-out paid in full if you remove me from management without cause?
• What is the liability cap, how long do the warranties survive and is there W&I insurance?
• Is the deal approved by your committee and is the financing committed?
• How many months of stay-on do you require, under what contract and on what pay?

A vague answer to any of these is information: that amount is not yours yet.

What if the lower offer is from a competitor and the higher one from a fund?

This is the most common situation and the one decided worst.

The competitor usually pays more at closing because it needs less debt, asks for less stay-on and runs faster due diligence because it knows the business. In exchange it wants to see your customers, your prices and your margins, and if the deal collapses it will have seen them. It also tends to integrate: the brand, the team and the office can all disappear.

The fund pays a higher headline but structures it. There will be an earn-out, often reinvestment of part of your proceeds into the equity of the new holding company, a long stay-on and a growth plan somebody has to execute. Its information demands are heavier, its timetable longer, and its offer depends on a committee and a bank.

Three practical rules for that situation.

• Protect information from the competitor. Release it in phases: aggregate data first, customers coded rather than named, margins by product line without names, and the sensitive material only in the final weeks and under signed exclusivity.
• Value the reinvestment separately. If the fund asks you to reinvest, that money is not price received: it is a new investment in a leveraged company you do not control. Analyse it as an investment, not as price.
• Decide on certain cash. If the competitor's certain cash beats the fund's, you have the better offer today and the worse one if everything goes well. Choose on your age, your wealth and your appetite for three more years of work, not on the headline.

What is the next step for comparing my two offers?

Build the table before you reply to anyone. Put the two offers in rows and use these columns: headline, net debt, working capital adjustment, cash at closing, escrow, nominal earn-out, probability-adjusted earn-out, vendor loan, fees, tax, certain net and expected net. Add two more columns: months of stay-on and warranty cap. Then go back to both buyers with the list of questions and one specific request for each: ask the lower bidder to raise the price, and ask the higher bidder to move money from the conditional tranche to closing. A process with two live offers is the only moment when that request carries weight.

At Capittal Transacciones we build that table with owners who have two offers on the table and we negotiate the split between certain cash and conditional cash. We are a mid-market M&A boutique operating in the approximate range of 3 to 250 million euros, with eight offices in Spain (Barcelona as headquarters, Madrid, Girona, Lleida, Tarragona, Palma, Zaragoza and Valencia) and we are part of the NRRO group. The partner handles each mandate directly, including the comparison of offers and the negotiation of the conditional tranche.

Keep reading

• Guide: every decision you face when selling your company
• A buyer asks for exclusivity, should you grant it?
• When the buyer wants you to finance part of the price

Put both offers in comparable euros: talk to Capittal