Wednesday, April 7, 2010

How a Buyer pays for your website matters

Youtube was famously bought by Google for $1 billion, but did Google really spend 1 billion "real" dollars?

Not really.

In reality, Google purchased Youtube with $1 billion worth of stocks.  This actually makes a big difference for public companies as they leverage difference ways to finance an acquisition depending on the discount given that gives them the most financial advantage. There isn't any crazy Voodoo magic going on here.  The company is simply trying to get the most out of every dollar.

For example, when a company's stocks are overvalued, it is more likely they would have the incentive to buy companies with stocks rather than cash.  This is because it is financially "cheaper" for the company.  On the other hand, until recently Microsoft has been doing most of their acquisition with cash.  This was because their stocks were undervalued and they had plenty of unused cash in the bank.  Instead of giving a Seller stocks that may end up being worth more than the cash amount, it was more financially smart to buy companies in cash.

This also applies when companies are making payments over time.  Cost of capital to a corporation is extremely high, much higher than any individual would experience.  Because of this, most companies can leverage this to be able to reach a higher headline number and still meeting their NPV (Net Present Value) targets.

For example, a company an offer me $1M over time, or $500K upfront.  This isn't because the company is being cheap, or does not have the appropriate financing to pay for the deal upfront.  The decision is purely a financial one.

Based on their analysis, a Buyer may believe a website is only worth $500,000 NPV.  But if the Buyer is willing to accept payments over time, they can stretch out the payments using their Cost of Capital as leverage and give the Seller a higher aggregate price, also called the headline value.  Ironically, Lottery payouts work the exact same way.  Most lottery payouts have a much higher number consisting of small annual payments over a 30-year period.  You can also elect to take the upfront payment, which usually is much less.

Since at most Sellers can only get 2% interest on the money in the bank, most of the time it is beneficial to both the Seller and the Buyer to receive payments over time.  Just make sure the payments over time are guaranteed and not contingent. 

Payment structure is just another lever in the Buyer's tool bag that they can use to get a deal done.  The more informed you get about a Buyer's process, the more you will understand where you can push and where you can't. Transparency and understanding will help accelerate any deal along.  Depending on your goals (whether you really want to get the most you can or just the most upfront to invest in another project) the Buyer will be able to work with you to achieve that.

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