There is a myriad of ways to structure a deal when the owners are looking to sell out the stocks or their company in the pursuit of an exit strategy. Each different strategy require that the owners’ needs and wants are met in a way that they will be comfortable enough to accept the deal terms and sign on the dotted line at closing.
When deciding whether to accept a cash offer or a stock offer it is important to first outline what you want to achieve. While cash offers are attractive because of the liquidity and the safety of the deal—you know exactly what you will be getting—they are often valued based on the risk associated. If, however, you are willing to accept stock in the newly formed company then you will, in most cases, receive a greater dollar valuation because of the additional risk you are accepting with the transaction.
Lets look at an example, if you have two offers on the table and one is for cash at $16 million and one is for stock valued at $20 million that can be sold over 18 months with one third of the stocks available for sale after every 6 months, which offer is better? Now assume that the value of the stocks could increase or decrease ultimately changing the valuation on your company, now which one is better? With public companies you can also hedge against the fluctuations in stock price using the futures markets. This could also be used as a tool in valuing the business prior to the sale.
The attractiveness of one of these offers in comparison to the other may change dramatically depending on the age, future plans, career goals, and life style of the buyer. This is why it is important for the buyers and the sellers to discuss the implications of each offer and figure out a way to structure the deal to meet sellers’ needs and the buyers’ pocket book.