147. Buying without paying

Dear Erik,

In February of this year, we bought a recruitment agency in the Czech Republic with offices in Prague and Brno (GIT), which specializes in the IT industry. And, nine months later, I can say that this was a great decision. The entire team at GIT are really nice and highly competent and the results are good.A year before the final share transfer, we were already talking to the seller, an English investment company specializing in the staffing industry. It takes quite a time to acquire a company, and it is fairly complicated and very exciting. What I would like to share with you is that many companies are bought without cash being paid up-front. This British investment company has built an ‘empire’ without them having (much) money invested. They bought businesses via share exchanges. They also suggested this to us some years ago. The financial offer was great. The only downside was that they wanted to pay for our shares by exchanging them for their shares, which are quoted on the Mid Cap in the UK. These shares were not tradable, because there were no buyers. I know some Dutch entrepreneurs who have swapped their shares with them when their shares stood at 30 pounds, but by the time they were able to cash in the shares, they were only worth a few pence. So they had no shares in their company anymore and no money.

We didn’t have to pay cash for GIT at the date of the share transfer. We agreed on an earn-out fee and we will pay a percentage of the turnover from all the clients at the time of the acquisition over the next three years. In this way, the investment company gets a very good price if sales remain stable and we are not at risk (unless we make a loss with the company). This year the profit is higher than the earn-out fee that we have to pay, so both parties are happy.

Many companies are taken over without the selling shareholders receiving the full hundred percent in cash. This is wonderful for the purchaser, as you avoid a huge risk and it places no demands on your cash balance. You finance the purchase from the revenues of the acquired business. And if the purchased company makes enough profit, you actually acquire a company for free.

The only challenge is that the company does not have to make a profit, but this is obviously under your control to a large extent. I wish you every success with the purchase of the company and I am curious about the outcome.

Regards,

Gerard