Bad Consideration in a Deal may be Worse than No Deal

Few buyers make all cash offers in middle market M&A transactions; preferring to offer any number of alternative forms of consideration. In order to meaningfully compare multiple offers to one another, all consideration must be weighted to its equivalent value in cash. Consideration may include:

  • Cash – “cash is always king”
  • Promissory Notes – interest rates, secured or unsecured, negotiable or non-negotiable
  • Company Stock – freely tradable or restricted, public or private, with or without put options
  • Earn-outs – short or long term, secured or unsecured

Other factors for determining the ultimate value of the buyer’s consideration include:

  • Tax considerations of ordinary income taxes versus capital gains tax consequences
  • Balance sheet targets in cash, working capital and total assets resulting in increasing or decreasing the buyer’s purchase price
  • Escrow and indemnity hold-backs in cash

The factors of consideration should be weighted by the standards of:

  • The time value of money
  • The probability of collection

The calculation and ranking of the respective cash equivalency valuations of multiple offers will provide for a robust discussion of what offer to accept.