How to acquire companies with their own money? a success story written by Patrice Suncic, one of our top executives and interim managers
XYZ is our main competitor, with similar activity than ours, but complementary and of great marketing interest. Its 2XXX revenue amounts to $110M and its financial result is nil. In 2XXX, XYZ shareholders gave up ownership, as a result of an LMBO (Leverage Management Buy Out), to 4 executives holding each 25% of the equity. The September 11, 2001 events produce tragic effects for the entire community of the US travel operators, and early November 2XXX, following a meeting in Chicago with XYZ’s owners / managers, it happens that their company is for sale at $7.5M asking price.
Our shareholders give us clearance to undertake such acquisition. I issue a conditional offer, at $7.5M price, subject to due diligence, after which payment terms will be exposed and final commitment given. The four XYZ shareholders agree.
Whilst performing due diligence, I detect that $1.8M in cash are blocked, of which $1M with USTOA (US tour operators association) to protect customers deposits against bankruptcy risks, circa $600K with their credit card operator and roughly $200K with various suppliers. Ourselves we have a $1M deposit with USTOA, which constitutes the statutory limit. Here comes to my mind the idea of recouping all these deposits and to use them to partially fund the acquisition. I check and then confirm the feasibility of such approach.
Furthermore analyzing how XYZ is handled shows that numerous opportunities exist, to merge or optimize activities (marketing, accounting / Finance, IT, call
centers, etc.) In my opinion delivering a $1.5M net profit is quite achievable at the end of year 1, tax free if we purchase the stock, which constitutes a
reasonable assumption supported by the fact that no legal risk has been found during the due diligence. And lastly the XYZ shareholders agree to be partially
paid in stock.
Using the same criteria they have themselves used to appraise XYZ at $7.5M, and over valuating our technology at $50M, I end up appraising our company at $87M. Thus, and even though our revenue is only twice theirs, I valuate us at 12 times XYZ. To be honest I was expecting serious objections about my valuation. At the end of the due diligence, and after getting clearance from our shareholder, I articulate the final offer, which stands as follows: