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Updated on: 25 Oct 2023, 07:20
Originally posted by parkhydel on 18 Apr 2020, 04:05.
Last edited by Sajjad1994 on 25 Oct 2023, 07:20, edited 3 times in total.
Last edited by Sajjad1994 on 25 Oct 2023, 07:20, edited 3 times in total.
Formatted
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Message from buyer to seller (Bill, co-founder & CEO)
10:07AM
Greetings, Bill.
As per our last conversation, we'd like to offer our bid at $20M for your internet website business. While this is lower than your stated selling price that we received from our mutual colleague (though not more than 40% lower than your offering price), we believe it can be a fair price taking into account current market conditions and future growth risk.
At an 8x revenue multiple (implying annual revenue * 8 = valuation of $20M), this already reflects a premium to many "established" companies - and among profitable internet companies, this is a healthy multiple.
Let us know if this is in the ball park range for a deal to be done.
10:07AM
Greetings, Bill.
As per our last conversation, we'd like to offer our bid at $20M for your internet website business. While this is lower than your stated selling price that we received from our mutual colleague (though not more than 40% lower than your offering price), we believe it can be a fair price taking into account current market conditions and future growth risk.
At an 8x revenue multiple (implying annual revenue * 8 = valuation of $20M), this already reflects a premium to many "established" companies - and among profitable internet companies, this is a healthy multiple.
Let us know if this is in the ball park range for a deal to be done.
0%
Be sure to select an answer first to save it in the Error Log before revealing the correct answer (OA)!
Difficulty:
35%
(medium)
Question Stats:
66% (02:23) correct
34%
(02:44)
wrong
based on 1597
sessions
History
Date
Time
Result
Not Attempted Yet
1. The proposed transaction structure offered by the buyer comprises what percentage of the deal in stock?
| 0% | |
| 20% | |
| 25% | |
| 50% | |
| 100% |
The seller's original selling price is greater than the revised offer from the buyer in "Email 3".: Possibly True
Annual revenues for the selling business exceed $2M.: Definitely True
The seller's business was worth less than $20M last year.: Possibly True
Be sure to select an answer first to save it in the Error Log before revealing the correct answer (OA)!
Difficulty:
95%
(hard)
Question Stats:
36% (01:55) correct
64%
(01:44)
wrong
based on 2260
sessions
History
Date
Time
Result
Not Attempted Yet
2. For each of the following statements, choose Definitely True if the statement is absolutely true. Choose Possibly True if the statement can be true but might not necessarily be true all the time.
| Definitely True | Possibly True | |
| The seller's original selling price is greater than the revised offer from the buyer in "Email 3". | ||
| Annual revenues for the selling business exceed $2M. | ||
| The seller's business was worth less than $20M last year. |
ShowHide Answer
Official Answer
The seller's original selling price is greater than the revised offer from the buyer in "Email 3".: Possibly True
Annual revenues for the selling business exceed $2M.: Definitely True
The seller's business was worth less than $20M last year.: Possibly True
The buyer does not believe existing management in the target company has the expertise to grow the business into its next stage.: Yes
The sellers' asking price for their business is at least $30M.: No
It is possible for the buyer and seller to make a deal in which neither side needs to change its opening offer by more than 30%.: Yes
Be sure to select an answer first to save it in the Error Log before revealing the correct answer (OA)!
Difficulty:
95%
(hard)
Question Stats:
33% (01:34) correct
67%
(01:32)
wrong
based on 2014
sessions
History
Date
Time
Result
Not Attempted Yet
3. Consider each of the following statements. Does the information in the three articles support the inference as stated?
| Yes | No | |
| The buyer does not believe existing management in the target company has the expertise to grow the business into its next stage. | ||
| The sellers' asking price for their business is at least $30M. | ||
| It is possible for the buyer and seller to make a deal in which neither side needs to change its opening offer by more than 30%. |
ShowHide Answer
Official Answer
The buyer does not believe existing management in the target company has the expertise to grow the business into its next stage.: Yes
The sellers' asking price for their business is at least $30M.: No
It is possible for the buyer and seller to make a deal in which neither side needs to change its opening offer by more than 30%.: Yes
reward the sellers for the company they have created thus far while denying them a right to have an ownership stake or operational role after the company is acquired.
Be sure to select an answer first to save it in the Error Log before revealing the correct answer (OA)!
Difficulty:
35%
(medium)
Question Stats:
53% (00:52) correct
47%
(00:55)
wrong
based on 1723
sessions
History
Date
Time
Result
Not Attempted Yet
4. The buyer refers to a "transaction in cash only" primarily to
| give the sellers a more liquid form of payment, in gratitude for all the work they have done thus far. | |
| deny the buyers the potential upside value of the future company | |
| introduce a new experienced team that would replace the incumbents during this next stage of growth for the company. | |
| reward the sellers for the company they have created thus far while denying them a right to have an ownership stake or operational role after the company is acquired. | |
| explain the importance of the strategic step of replacing existing management. |
ShowHide Answer
Official Answer
reward the sellers for the company they have created thus far while denying them a right to have an ownership stake or operational role after the company is acquired.
Buyer feels the target company's initial selling price is too high.: Yes
Seller feels his company's "revenue multiple" is greater than 8x.: Yes
A 100% cash acquisition of the target company would still enable the founding entrepreneurs to continue working for the company they created.: No
Be sure to select an answer first to save it in the Error Log before revealing the correct answer (OA)!
Difficulty:
45%
(medium)
Question Stats:
49% (00:42) correct
51%
(00:54)
wrong
based on 1696
sessions
History
Date
Time
Result
Not Attempted Yet
5. For each of the following statements, select Yes if true. Otherwise, select No.
| Yes | No | |
| Buyer feels the target company's initial selling price is too high. | ||
| Seller feels his company's "revenue multiple" is greater than 8x. | ||
| A 100% cash acquisition of the target company would still enable the founding entrepreneurs to continue working for the company they created. |
ShowHide Answer
Official Answer
Buyer feels the target company's initial selling price is too high.: Yes
Seller feels his company's "revenue multiple" is greater than 8x.: Yes
A 100% cash acquisition of the target company would still enable the founding entrepreneurs to continue working for the company they created.: No
17 Oct 2024, 08:33
Kudos
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Hi, I would like to weigh in here. Below is how I solved:
1. The proposed transaction structure offered by the buyer comprises what percentage of the deal in stock?
- 0%. This was pretty straight forward, since the entirety of transaction proposed by the buyer was 100% cash.
2. For each of the following statements, choose Definitely True if the statement is absolutely true. Choose Possibly True if the statement can be true but might not necessarily be true all the time.
The seller's original selling price is greater than the revised offer from the buyer in "Email 3".- Possible.
- “though not more than 40% lower than your offering price”. This means, that the max we can think of Buyers stated price would be $33M. How? Assuming its exactly less than 40%. So,
\((Original stated amount)*\frac{60}{100} = 20\) --> Solving this we get the upper limit of the asked amount as 33M. Therefore, it has to be less than 33M.
How is this possible? Bcoz, The revised price was 25M, so there’s a possibility that this scenario can happen but not definitely.
Annual revenues for the selling business exceed $2M. –
Definitely True.
- In email 1, we got the valuation formula, implying annual revenue * 8 = valuation of $20M. Now, The annual revenue can be \(\frac{20M}{8} = 2.5\), which is more then 2M.
The seller's business was worth less than $20M last year. -
Possibly true.
- We don’t know, it can be and cannot be, we have no concreate data to validate this.
3. Consider each of the following statements. Does the information in the three articles support the inference as stated?
The buyer does not believe existing management in the target company has the expertise to grow the business into its next stage.
- Yes, can be inferred clearly from email 3.
The sellers' asking price for their business is at least $30M.
- No, cannot be inferred. We already know that the asking price cannot be more than 33M, it has to be less than that, but what’s the least amount that’s still not clear. It can be 29, 28, 28.5, etc.
It is possible for the buyer and seller to make a deal in which neither side needs to change its opening offer by more than 30%.
- Yes, can be inferred. So, a 30% decrease in sellers’ amount would drag down the price to ~ 23.1M & if there’s a 30% increase in buyers price it would move up the price to ~ 26M. So, there is a possibility of deal happening since, the numbers overlap.
4. The buyer refers to a "transaction in cash only" primarily to
There was a confusion in Opt C and D. AND here is how I eliminated C.
C- introduce a new experienced team that would replace the incumbents during this next stage of growth for the company.
“wish to keep the transaction in cash only - which means existing management would have no part in the business going forward.” - The problem here is, cash only transaction was to remove the entirety of existing management and that’s what the buyer is primarily focusing on. And not to just replace the existing workforce. His main objective is to remove the management and deny them any role whatsoever.
D- reward the sellers for the company they have created thus far while denying them a right to have an ownership stake or operational role after the company is acquired. - Yes, this is exactly true, to deny them ownership or operational means- deny them any role whatsoever.
5. For each of the following statements, select Yes if true. Otherwise, select No.
Buyer feels the target company's initial selling price is too high.
- Yes. Well of course, that’s why the negotiation started and the buyer gave all kinds of reason why the seller’s asked price is high.
Seller feels his company's "revenue multiple" is greater than 8x.
- Yes. “We expect our business to grow quickly in the coming months and at a revenue multiple of 8x, the valuation bid is lower than the potential value which will surely rise much higher than $20M.”
A 100% cash acquisition of the target company would still enable the founding entrepreneurs to continue working for the company they created.
- No, never. Remove management and deny any role whatsoever.
That’s my reasoning. Hope it helps.
1. The proposed transaction structure offered by the buyer comprises what percentage of the deal in stock?
- 0%. This was pretty straight forward, since the entirety of transaction proposed by the buyer was 100% cash.
2. For each of the following statements, choose Definitely True if the statement is absolutely true. Choose Possibly True if the statement can be true but might not necessarily be true all the time.
The seller's original selling price is greater than the revised offer from the buyer in "Email 3".- Possible.
- “though not more than 40% lower than your offering price”. This means, that the max we can think of Buyers stated price would be $33M. How? Assuming its exactly less than 40%. So,
\((Original stated amount)*\frac{60}{100} = 20\) --> Solving this we get the upper limit of the asked amount as 33M. Therefore, it has to be less than 33M.
How is this possible? Bcoz, The revised price was 25M, so there’s a possibility that this scenario can happen but not definitely.
Annual revenues for the selling business exceed $2M. –
Definitely True.
- In email 1, we got the valuation formula, implying annual revenue * 8 = valuation of $20M. Now, The annual revenue can be \(\frac{20M}{8} = 2.5\), which is more then 2M.
The seller's business was worth less than $20M last year. -
Possibly true.
- We don’t know, it can be and cannot be, we have no concreate data to validate this.
3. Consider each of the following statements. Does the information in the three articles support the inference as stated?
The buyer does not believe existing management in the target company has the expertise to grow the business into its next stage.
- Yes, can be inferred clearly from email 3.
The sellers' asking price for their business is at least $30M.
- No, cannot be inferred. We already know that the asking price cannot be more than 33M, it has to be less than that, but what’s the least amount that’s still not clear. It can be 29, 28, 28.5, etc.
It is possible for the buyer and seller to make a deal in which neither side needs to change its opening offer by more than 30%.
- Yes, can be inferred. So, a 30% decrease in sellers’ amount would drag down the price to ~ 23.1M & if there’s a 30% increase in buyers price it would move up the price to ~ 26M. So, there is a possibility of deal happening since, the numbers overlap.
4. The buyer refers to a "transaction in cash only" primarily to
There was a confusion in Opt C and D. AND here is how I eliminated C.
C- introduce a new experienced team that would replace the incumbents during this next stage of growth for the company.
“wish to keep the transaction in cash only - which means existing management would have no part in the business going forward.” - The problem here is, cash only transaction was to remove the entirety of existing management and that’s what the buyer is primarily focusing on. And not to just replace the existing workforce. His main objective is to remove the management and deny them any role whatsoever.
D- reward the sellers for the company they have created thus far while denying them a right to have an ownership stake or operational role after the company is acquired. - Yes, this is exactly true, to deny them ownership or operational means- deny them any role whatsoever.
5. For each of the following statements, select Yes if true. Otherwise, select No.
Buyer feels the target company's initial selling price is too high.
- Yes. Well of course, that’s why the negotiation started and the buyer gave all kinds of reason why the seller’s asked price is high.
Seller feels his company's "revenue multiple" is greater than 8x.
- Yes. “We expect our business to grow quickly in the coming months and at a revenue multiple of 8x, the valuation bid is lower than the potential value which will surely rise much higher than $20M.”
A 100% cash acquisition of the target company would still enable the founding entrepreneurs to continue working for the company they created.
- No, never. Remove management and deny any role whatsoever.
That’s my reasoning. Hope it helps.
14 Dec 2023, 21:43
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priyadabas01
"Not more than 40% lower" means that the 20 million is 40% OR LESS lower than the offer price. So theoretically, 20 million could be 35% lower than offer price or 30% lower than offer price or even 20% lower than offer price. This means that the offer price could be anything above 20 million UP TO 33 million.
And that should sort out your issue in both the questions.
If the initial price/offer price of the seller is between 20 million and 33 million, it is POSSIBLE (though unlikely in a real world case) that the offer price is less than 25 million.
