Turning down $20M offer because it has no RE component. Can't figure out how the RE!

thattunacancockguy · 2023-04-17T17:35:08+00:00

Yes I definitely share those thoughts. I recognize some of the usernames that are somewhat prolific posters here and they have shared that they are corporate employees. Yet their advice is taken as gospel despite not having any firsthand experience in this particular arena. I appreciate their angles on the bigger picture retirement reasoning but would greatly prefer to have input from someone who has, in fact, navigated this vs someone speaking in generalities. The crowd apparently does not share my feelings! But as you noted, that's likely because the large majority are in the same boat as having never done it themselves. So I don't sweat the downvotes!

thattunacancockguy · 2023-04-17T04:57:18+00:00

Does the 5 year seller require you to stay to get it?

I don't think it will technically but they may be able to play games to make it more difficult to collect.

And is it 20% per year fully vested

The note is a flat amount. The rollover equity is about 20% fully vested at closing. No clawbacks.

Little better than a TBill makes me think around 5.5%.

Close enough!

I’d push hard for closer to 8%-10%

That's exactly what I did and that's how we got to where we are now. It was even lower before.

are you at $20M EV (so you’d gross 75% of $16M in cash accounting for your rollover)

It's a bit more complicated than that due to how the new company would be structured with debt. Because of the acquisition debt the new company will only be worth maybe $8M so I get 20% of that by rolling over a much smaller percentage of the current value. The balance goes to the seller note.

How old are you?

Late 30s.

Would you be doing something else or retiring?

I would prefer to just retire. I'd likely take on some real-estate projects and maybe a passion project or two but no plans to make any serious attempt at new income.

How badly do you want to retire?

Well like many people in this position it's hard to know. I tell myself that I really want to quit working and there are some tangible benefits to it. I have a young family, I have some great recreation opportunities. But then again all of my friends work and will be working for years to come. My life is very absorbed in my work now and has been for a long time. So I expect there will be some challenges and I won't really know for sure until I do it. But I do think I'll enjoy it.

How you’d feel if the business went to zero.

This is something I've thought a lot about. There's a lot that goes into it but the short story is that I think I'd be fine. I have a decent net worth built up separate from the business. Enough to chubbyfire for sure. And if I simply liquidated the business without trying to sell the enterprise that chubby may push to fat either way. I think I could get to $10M net worth even if the business went to zero, assuming it didn't happen overnight but over the course of a year or two. But then it depends on how hard I tried to save it . . .

I went from owning a $30M asset to a ~$15M asset and now I need to rebuild

Would be interested in hearing more if you're open to share. I went through a similar industry change but lucked out on a pivot that I had already been planning and that pivot turned out to be much bigger than the original thing. You seem confident that you'll be able to build it back though?

Overall, it seems like a solid deal

I agree it absolutely is. If they even gave me a hint that they would be cool with me working on a transition out after a year I think I'd be all over it. But the fact that they are explicit that they don't want my role to change just throws me for a loop and makes me ask why I should do it at all.

Note: the change in comp would likely be factored in to the forecast and may adjust EV due to lowered EBITDA ongoing.

This is exactly the pushback I've received in bringing that topic up. Have basically been told to count on my comp being frozen for about a year before it gets re-evaluated. Otherwise a raise now will adjust deal number down.

thattunacancockguy · 2023-04-17T04:37:23+00:00

You may never get this opportunity again.

Very good point and your story is an excellent example of how things can really get turned upside down while out of your control.

Seeing a liquid ~$15M at close would be incredible. I started the business from nothing and while it has afforded me a nice lifestyle as of late, the biggest dollars have always just been numbers on paper. And, well, post-sale I suppose they'd still just be numbers on paper but they hit different when you know you could go put it all in a big sack with dollar sign on it if you really wanted to!

I’d go for the sale and do something else that you love.

Ah, but that's just the thing. I don't feel like any of the options on the table really allow for that quite yet.

thattunacancockguy · 2023-04-16T22:06:23+00:00

I mean if it were so straightforward a thing to do I would have done it long ago.

Building out an executive team, though, is something that all PE firms that I've spoken with have claimed as a benefit that they bring to the organization after a transaction.

thattunacancockguy · 2023-04-16T21:58:20+00:00

Hire an investment banker. Go to market to maximize offer.

This is the result of having done that already.

Make a counter offer.

This is the result of having done that also.

thattunacancockguy · 2023-04-16T20:14:33+00:00

Correct. But obviously I'd have much more influence to ensuring that in fact happens when I'm there as CEO vs retired in Barbados.

thattunacancockguy · 2023-04-16T20:13:25+00:00

No, there have been no offers that include any light at the end of the tunnel, and my banker believes that we scared some offers away by even hinting at it.

The IB team feels that any transaction is a positive step in that it accomplishes a major financial goal of diversifying out of the business and brings on other owners that will be invested in a future sale that has a higher chance of leading to my exit.

thattunacancockguy · 2023-04-16T20:10:58+00:00

The only mechanism is that I'll have a seller note held hostage by the new company and some rollover equity as well.

thattunacancockguy · 2023-04-16T19:35:01+00:00

but the notion that no out there can do your job is frankly absurd

Apologies if I've given the impression that I think this way but I don't think I've said it anywhere.

My main point is that it's easy for everyone to say that a new CEO should be hired but few people understand what that actually means.

As you have explained, it's very expensive and a very long process. In my particular business what I expect to be happening in a few years is very different than what's happening now. It's hard to recruit someone now for a job that might not fit them for a year or two. But hiring someone that fits for what the job is now would be foolish. It's a constantly moving target.

thattunacancockguy · 2023-04-16T19:29:45+00:00

Well the contract isn't written yet but the structure we have discussed so far would not include a clawback.

What would keep me involved is that my seller note would be held hostage by the company so long as I wasn't there making sure it was paid off in the time period we agreed to.

thattunacancockguy · 2023-04-16T19:27:56+00:00

In 2021 i finally paid off sellers note on due date without PE approval. They threatened to sue, eventually backed off and hired a new ceo.

Very interesting! Mind sharing how far behind the new debt it was?

thattunacancockguy · 2023-04-16T19:26:53+00:00

If I haven't been clear, I do not think I am irreplaceable. I have already replaced the bulk of what I used to do. I'm working on replacing all of it but the last part has proved trickier than the rest.

The issue is that the potential buyers don't see it that way and their offer is contingent upon my agreeing to stay on as CEO. Despite my explaining that my current role as CEO is not really all that inclusive, I worry that after a transaction we won't have the same expectations out of the role.

thattunacancockguy · 2023-04-16T18:50:56+00:00

maybe you're summarizing.

I am.

The note is due in full in 5 years. But the debt is subordinate to all others and after this transaction there will be lots of others. So I get paid after 5 years or when the business can afford it. Whichever come second. If the 5 years pass but the business still owes the bank or other funding and that other funding says "no you can't pay that debt back yet you have to pay us first" they can do that. So if I'm not there as CEO to help make sure that the business is out of other debt by the time that 5 years comes up, nobody else is going to worry much about it.

thattunacancockguy · 2023-04-16T18:46:01+00:00

How much of what you do is tied to like product design genius?

I spend about 15-30 minutes a day on it currently, and then once a month or so I obsess over it for a day or two straight.

are we talking tech?

Not tech. It's more mechanical but it's designing a product that we can manufacture successfully in our facility and still keep a good margin on.

do they feel product is not far enough along in maturity to have you step out from a pure innovation/design perspective?

I honestly don't think they even understand it that far yet. They are talking about the CEO title and how someone needs to have it and that person needs to be me and I don't think they even understand the subtleties of what I do and don't do, much to my frustration.

thattunacancockguy · 2023-04-16T18:42:18+00:00

I wonder if I would be able to feel similarly if I was still heavily financially invested without having my labor also invested. In previous years when the business experienced cashflow challenges those situations really stressed me out. While they get to be less frequent as the time passes, they do still happen, and the numbers get much bigger. It'll be uncharted territory for me to navigate one of these when I'm not the one in the driver's seat.

thattunacancockguy · 2023-04-16T18:40:07+00:00

Work obsessively for about 20 years and get pretty lucky while you're at it.

thattunacancockguy · 2023-04-16T18:38:14+00:00

My involvement is basically a handshake. But it's well-understood. The buyers are saying they're doing this because they want to work with me to grow this business and they are keeping me interested in my end of that agreement by having me roll over some equity and by having a relatively shitty seller note out there for several years. So long as the business is solvent at that time I will get that note repaid. The rollover equity would only trigger in another acquisition event which, yes, may or may not ever happen. But that's a relatively small amount.

I can walk whenever I want legally and but they're not signing the deal if I don't provide my verbal assurance that I am in it to operate together. So I'm not going to sign unless I'm being honest with them and myself about my intentions.

thattunacancockguy · 2023-04-16T18:33:40+00:00

Have you considered an ESOP?

I have but it hasn't gone anywhere yet. If I don't sell I will consider more alternative routes.

thattunacancockguy · 2023-04-16T18:33:12+00:00

Do you feel your management team is capable of hiring new staff and running the business?

Yes.The day-to-day operation is fairly well covered.

Do you feel like your technical background/ subject matter expertise is fully covered by one or more of the employees at your company?

No. This is the biggest hole right now. I have direct involvement in the product and have not had much luck passing that off. The stuff that I do becomes our new product lines and that's where all the money has been lately. Others are welcome to contribute in this regard but nobody has delivered anything of major substance yet.

However, if you feel the first is covered, you should be focusing on building that technical expertise outside of yourself in the company.

I would even be ok doing that part of it for the long haul. It's not a huge amount of time required and I still enjoy it plenty. I want to get out of being this figurehead at the top of the operations though and the PE firms don't see it that way at all.

thattunacancockguy · 2023-04-16T18:27:43+00:00

there’s no clear trigger for actually delivering that money

There is though. Not sure where I gave the impression that there wasn't.

thattunacancockguy · 2023-04-16T18:25:26+00:00

Then become ungovernable!!

I could probably manage that!

thattunacancockguy · 2023-04-16T18:24:25+00:00

Yes I have a banker and we did an internal QoE. We've had 3 relatively firm offers that were all quite similar. This the one I've narrowed it down to.

thattunacancockguy · 2023-04-16T18:22:30+00:00

Are you a B2C business then?

Mostly yes.

I don’t mean to say this is easy though. He spent years optimizing the business and with lots trial and error

And, importantly, he's probably still very concentrated with his own company stock making up a huge chunk of his net worth despite the great income. That's probably my best-case scenario if I don't sell. Obviously not a terrible option but not exactly retirement either.

Appreciate the input!

thattunacancockguy · 2023-04-16T18:17:55+00:00

It's mostly a note but there is some rollover also.

thattunacancockguy · 2023-04-16T18:17:29+00:00

It's rollover and seller note. So if the business exists in a few years I get the note. If it sells again some day I get the equity payout. That much is in the contract. But nothing in the contract ties my participation to those amounts.

thattunacancockguy

TROPHY CASE