Sellers of middle market companies rarely receive all cash offers for their companies, and therefore, must compare multiple offers by weighing each component of consideration in accordance with its cash equivalency as a baseline. The two most common standards for weighing the components of consideration include: the time value of money and the probability of collection.
The time value of money standard states that a dollar in the bank today is worth more than a reliable promise or expectation of receiving a dollar at some future date. The calculation considers interest rates, number of periods, payments, present value, and future value. The probability or likelihood of collection is reduced most significantly by:
- Post-transaction buyer remorse
- Bumps and bruises acquired from pre-transaction negotiations
- Miscommunication and misunderstanding of earnout agreements
- Post-transaction manipulation of company’s financial performance
With a weighting protocol established, these basic financial management concepts allow sellers and their M&A Team to calculate the respective cash equivalencies of the multiple offers on the table. The collective team may then discuss, rank, and identify the best offer.