Merger or Acquisition?

[Black Irish]

Can any of you stalwart IE brethren shed some light on this proposed M&A transaction? My employer is a privately owned restaurant company and the big bosses have been talking up all year about how they are planning to buy another concept to put under our umbrella. On a recent call, our COO gave us some details, saying the deal is about done. The deal will take effect at the beginning of the year. However, both sides have the right of refusal or re-negotiation if certain EOY profits before EBIDTA are not hit.

I’m no expert, but if this is a straight up acquisition, why would the other company care what our profit numbers are? We can either afford to buy them or we can’t. The bank loaning the money may care, but it shouldn’t matter what my company’s balance sheet is to the target of acquisition. It’s like buying a house. If you can meet the asking price the homeowner doesn't need to see your pay stubs and bank balance. That's the bank's end of things.

Unless I’m missing something, the way this deal is being described makes it sound more like a merger than an outright acquisition. Like I said, why does the restaurant concept being sold care if the buying concept hits a certain revenue target? But if it's a merger, then it makes sense that both parties are combing over each other’s books. A merger is a whole different ballgame than an acquisition and the fact that my company keeps saying it is the latter when it looks more like the former is strange. Does anyone have any insight on this?

 

[NDBoiler]

It’s possible that individuals of the business being acquired are being compensated at least in part by a percentage of future profits of the new entity. In that case, they would want to be pretty sure that there is a consistent history of profitability of your company.

 

[sfk324]

Can any of you stalwart IE brethren shed some light on this proposed M&A transaction? My employer is a privately owned restaurant company and the big bosses have been talking up all year about how they are planning to buy another concept to put under our umbrella. On a recent call, our COO gave us some details, saying the deal is about done. The deal will take effect at the beginning of the year. However, both sides have the right of refusal or re-negotiation if certain EOY profits before EBIDTA are not hit.

I’m no expert, but if this is a straight up acquisition, why would the other company care what our profit numbers are? We can either afford to buy them or we can’t. The bank loaning the money may care, but it shouldn’t matter what my company’s balance sheet is to the target of acquisition. It’s like buying a house. If you can meet the asking price the homeowner doesn't need to see your pay stubs and bank balance. That's the bank's end of things.

Unless I’m missing something, the way this deal is being described makes it sound more like a merger than an outright acquisition. Like I said, why does the restaurant concept being sold care if the buying concept hits a certain revenue target? But if it's a merger, then it makes sense that both parties are combing over each other’s books. A merger is a whole different ballgame than an acquisition and the fact that my company keeps saying it is the latter when it looks more like the former is strange. Does anyone have any insight on this?

Best I can guess with the information available is that the target is being acquired for equity in the acquiring company as opposed to cash, and if the equity stake isn't worth what they are bargaining for in the sale, they want to be able to unwind.

I think this blog post covers what you are describing.

Rolling Over Without Getting âRolledâ â Points to Consider in Connection with Rollover Equity

www.calfee.com

 

[402puck]

Do you guys own Hacienda or a Skyline franchise by chance?

That’s way closer to the level of expertise of this board

 

[SWirishfan]

The other option is that the acquisition target is not getting the full price up front but being paid over time. The sellers take a smaller payment upfront (and in full) or a larger payment amortized over an agreed upon period of time. They sellers to see profit and cash flow above operational and capital needs that allows for continued payments.

I have seen it once, between two relatively small businesses. The seller agreed to something like an structured pay settlement

 

[NDPhilly]

Not talking about this on tigerdroppings can tell you that

 

[jerseyborn1971]

It’s possible that individuals of the business being acquired are being compensated at least in part by a percentage of future profits of the new entity. In that case, they would want to be pretty sure that there is a consistent history of profitability of your company.

I was so proud of myself that I thought of this too, but only because I watched Succession on HBO.

 

[Black Irish]

I appreciate the responses so far. If the other company is getting paid over time it makes sense they want to see my company's balance sheet. That's annoying that we can't just buy them out and be done with it. I guess you either owe the bank or you owe the people you bought, no one has a few hundred million just laying around (except Mr Burns & Scrooge McDuck). On top of everything else they break our balls about now we have to sweat being able to cough up our monthly vig to the restaurant group we bought. The weekly conference calls next year will be even more fun.

 

[Cackalacky2.0]

Working in the restaurant business for many years, restaurants and specifically the locations are historically trendy… ie the amount of business for a restaurant varies over time either due to drops in food quality/service or trends in visitations at that location due to other choices being available in the same area. This may be another reason to have an out of the short term success isn’t there or doesn’t last after the acquisition.

 

[FOTY977]

I am not a restaurants expert but I work at an acquisitive firm, have clients in the RBT space, and see some similarities going on here. Bilateral breaks aren’t uncommon nor are earn outs as others have noted.

I’d second your comment that next year isn’t going to be more fun. If I’m reading the tea leaves correctly, the restaurant group receiving the vig is where the power in the org sits now. As a capital-light, recurring revenue, fee-bearing business that entity is going to be pumped up for a liquidity event at some point in the medium term future. Fee-based business like that trade at much higher multiples than razor-thin restaurant margins.

The restaurant concepts downstream are going to be increasingly squeezed to demonstrate the value of the shared platform model. This is not a unique phenomenon to your industry, but you might consider finding a way into the restaurant group earning the fees or put some serious thought toward your career planning asking if this is where you want to work for the long run.