Valuation Range and Seller’s Debt in an M&A Indication of Interest
The valuation range is the heart of the M&A indication of interest. Because the indication amounts to little more than a “dipping the toe in the water” exercise (Buyer isn’t yet committed to the purchase), the valuation is estimated. Valuation usually appears as a range, largely to allow Buyer to hedge her bets.
After Buyer gets more information in the management meetings, she can amend her offer and provide a specific valuation. In a practical sense, the Seller usually sees the higher number and focuses on that. Buyer has the wiggle room to offer the lower number.
For all intents and purposes, Seller should focus on the lower number in the valuation range because that’s probably the valuation Buyer will end up using in the LOI. If Buyer comes back and uses a higher valuation, Seller will be pleasantly surprised.
The truth of the matter is that most Sellers (or their investment bankers) immediately look for the valuation range. All of the work going through the M&A process boils down to one thing: the valuation. Because the valuation range is the first thing folks in-the-know look for after receiving an indication, Buyers sometimes put that bit in bold.
The M&A indication of interest also usually answers the question of “who gets the cash, who takes care of Seller’s debt?” In most cases, Seller keeps all the cash in the company’s bank account. Buyer usually assumes the current payables (defined by payables within terms; if Seller is late in paying her bills, she’ll have to pay those debts at closing).
If Seller has borrowed money, which shows up on the balance sheet as long-term debt, Seller is responsible for paying off that debt.
In some cases, however, Buyer may decide to assume Seller’s long-term debt as part of the purchase price. When that happens, the amount of Seller’s debt tacks on to the deal value. In other words, if Seller agrees to sell the business for $10 million in cash plus the assumption of $3 million in debt, the total deal value is $13 million.
Lastly, any special conditions, such as Seller maintaining or achieving some sort of financial metric such as EBITDA (earnings before interest, taxes, depreciation, or amortization), appear in the indication.