Money Games: Sell Your Company Now

Should you sell to private equity or trade buyers?

Focus on who you think will give you the best exit, considering:

• Total price: Depending on market conditions, private equity buyers can outbid trade buyers due to their leveraged funding approach. However, when debt markets are challenging (ie today), this situation can reverse
• Cash on closing: Private equity will generally want to minimise the up front cash component, so tend to offer less cash up front than trade buyers
• Earn out: Most buyers defer part of the cash component of the sale price based on how the business performs. Both trade and private equity buyers use this mechanism, although for trade buyers it inhibits effective integration of the business into their own because of conflicting management incentives
• Equity roll over: Private equity firms generally want management to roll over a meaningful proportion of their current shares into the new entity which owns the company. As the private equity firm will be looking to generate a 3-5x money multiple when it sells the business as part of its own exit, this can be actually be quite valuable to you. Trade buyers may ask management to accept shares in the acquiring company as part or all of their payment, which depending on your assessment of their own prospects can also be valuable. Be very clear on what you need to take off the table now, and what you are prepared to risk in future
• Culture: Private equity firms drive their acquisitions very hard, so management will generally work longer hours in a private equity owned company. If management want to see their families occasionally, a trade buyer may be a better option

If you decide to target private equity buyers, firms tend to specialise in specific deal sizes:

• Small: $30-50 million
• Mid-market: $50-200 million
• Large: $200-500 million
• Mega: More than $500 million

What is your company worth?

Buyers always think your company is worth less than you expect, because their view of risk is based on their own investors' views of risk. In terms of valuing your company, the usual methods are:

• Present Value ("NPV") using Discounted Cashflow ("DCF") projections
• Trade buyers may use their own Weighted Average Cost of Capital ("WACC") discount rate
• Private equity firms will often use a 30 per cent discount rate
• Recent comparable transaction operating profit multiples (Enterprise Value/Operating Profit) using last year's actual performance and this year's projected performance. Investors tend to be more comfortable with valuations based on profits already delivered than those projected
• Comparable public company Operating Profit multiples, modified to reflect different risk levels, limited liquidity, and other specific differences such as capital structure and growth rates, between your company and comparable public firms

In today's videogames market, we have seen everything from less than 1x revenue to over 13x revenue and sensible operating profit multiples to those approaching infinity. Some people like to use proxies such as Enterprise Value/Number of registered or paying users, but the ranges here are also very broad.

So while it isn't an easy question, you need to take advice on what is realistic and work from there.