What should I look for with non-cash consideration?
I received an offer for my business and part of the purchase price is stock in the buyer's company. What are some things I should look out for and questions I should ask?
Receiving consideration other than cash is not uncommon. In fact, it is very rare that vendors receive all cash for their business. Different forms of non-cash consideration include a seller's note, an earnout or, in your case, stock in the buyer's company.
The three most important things that you should consider if you are receiving shares of another company when selling your business are:
Is the acquirer a public or private company? This question is relevant in determining the value of the stock consideration being received in the sale. If the company is public, the value of the stock can be easily determined by looking at its trading price on the stock market. If the company is private, determining the value of the stock consideration is more difficult. In this case, you should ask for an analysis of the company's share value.
What is the future potential of the acquirer's business? If you are receiving stock consideration for the sale of your business, you are essentially exchanging the risk of holding shares in your company for the risk of holding shares in their company. Are you confident in the management team, the company's service/product and the future market opportunities of the buyer? These items will obviously impact the future value of the shares.
How and when can you convert the stock consideration into cash? Stock consideration from public companies usually comes with a restriction period where the seller must hold on to the stock for a defined period of time. Also, if you receive a significant amount of public company shares and the stock is thinly traded, the ability to sell a large number of shares in the open market could be tough. When receiving stock of a private company, you need to understand the plan for liquidating these shares. Is there an imminent IPO or other liquidity event that will get cash in your hand for those stocks?