The. It's hard to quantify what the key person risk was. So, you know, if you go through the thought experiment of the seller, the founder and seller, smart Tours, hiring a banker or broker, intermediary and running a process, it's not obvious to me that he would have ended up in a substantially different spot.
Acquiring Minds
Buy Well, Exit Better: A $67m Win in 4 Years
Excerpts · 332 segments · ~1:35:43 long
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Now, the 50 seller note where we ended up landing, that probably wouldn't have been in there, but there would have been considerable ongoing skin in the game for him. There, There had to be. The key person risk was, was too significant.
So the, the deal, as I reflect on it was, I think, you know, much more frankly fair and reasonable than it, than it sounds on the surface when you really think about how much embedded risk there was in the, in the business that we bought. And now that was an opportunity where part of the trade or the arbitrage was buying a business with those terms.
And if we could basic, if we could basically mitigate or get rid of this key person risk, that's, that was a big part of, of the ultimate magic of, of what we did.
Absolutely.
But, but I think it was fair. I really do.
It's such a, it's such a good point. When we think about kind of creating value in an acquisition. The, the kind of our minds all go to growth, which of course is the obvious one.
But there's also just de Risking the business. So, you know, if, if you just de Risk a business, you create value if. And then I don't think anybody would want to de risk and then promptly sell it, but arguably you could just, just with no EBITDA growth, with no revenue growth, but a much more robust infrastructure, it's a much more valuable business.
When you say he would have had to have some sort of skin in the game, no matter what, with whatever structure would have come up with what just for quick education to the audience, what are the flavors of skin in the game?
Yeah. So three principally, one would be the seller note, which he had, although a seller note of, you know, 50% of it of a deal for a, for a business of this size is is more or less unheard of. It's it's more common at the for considerably smaller businesses where terms are a bit all over the map. Next would be equity rollover and the last would be in earn out.
And you know sellers have different different opinions on on those three different forms of consideration. Often allergic to all three and most allergic to the idea of an earn out. But seller notes are quite common in the search context where sellers are looking to transition towards retirement and and not stay particularly involved in the business post.
Close we talk about forgiv forgivable seller notes a lot in SBA self funded land. Same in traditional land for bigger deals. That there just is that that is.
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