In previous posts, I’ve discussed how seller financing is the key to acquisition financing. While seller notes are certainly helpful, nothing pushes an acquisition like a seller excited about owning stock in the newly combined entity. For cash-strapped micro-caps, sellers really need to take some stock for the deal to close.
At Acquis, we know how important is is that buyers, sellers, and investors, “row the boat in the same direction”. In fact, our logo represents that coordinated effort. Buyers clearly have a goal of seeing the newly combined entity succeed and, as equity driven participants at Acquis, we too have a lot riding on future business success. Seller motives, on the other hand, tend to vary.
I have seen sellers begging for more stock and I have seen sellers literally say “I don’t want any of your company’s stock”. As a buyer, which of these two extremes would you prefer to work with? Hopefully, you agree that it’s the seller who wants your stock.
A seller who believes in the future of the business (and proves it by taking a significant equity position a/k/a a “rollover“) is the kind of seller who will encourage investors & lenders, be flexible with a buyer to make the deal work, and help the newly combined entity succeed in the future.
So what if a seller only wants cash? My advice would be to proceed with caution. While there are often legitimate reasons for wanting more cash, those reasons typically don’t favor the buyer. For cash-strapped acquirers, raising capital can be difficult and that process is made even harder when sellers ask for more cash as they signal that they don’t believe the future of the business. Not taking stock signals that sellers don’t think the newly combined entity will be successful and perhaps they don’t believe in the future of the target itself.
I speak with a lot of cash-strapped acquirers. Some run around spending money they don’t have on targets that are looking for a big payday while others target deals using stock and other forms of seller financing (with small cash components). In my experience, the buyers who spend too much money they don’t have don’t succeed and those that “sell” sellers on the future of the combined entity have a much higher success rate.
Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.
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