Case 033M&A strategyWarm up
A family can sell its spice business today at 10x, or take a dividend recap now and sell in three years. Which path is worth more, and what do you tell them in a 15-minute presentation?
1The situation
The family that owns Gauravi Spices, with EBITDA of Rs 50 crore, has an offer of 10x, Rs 500 crore in cash, today. A lender has offered an alternative: borrow 3.0x EBITDA now, Rs 150 crore, and pay it all to the family as a dividend, keep running the business, and sell in three years.
The family's plan says EBITDA reaches Rs 65 crore in year 3, a sale then would be at 9x, and the business would have paid its debt down to Rs 100 crore by then. The family's adviser uses a 14% discount rate for money received later.
2Your task
Which path is worth more to the family today, how close is it, and what would you put in front of them?
Quick check
Before discounting, the recap path delivers Rs 150 crore now plus Rs 485 crore later, Rs 635 crore in all. After discounting at 14%, which path wins?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
Selling now is worth about Rs 23 crore more, Rs 500 crore against Rs 477.4 crore, under 5%, so the two paths are close. The recap pays Rs 150 crore today, and the year 3 exit leaves Rs 485 crore of equity, worth Rs 327.4 crore today at 14%. The recap only wins if the exit multiple beats about 9.5x or the family's own hurdle is below 11.5%. With values this close, risk and the family's goals decide it.
Step 1How do you compare cash today with cash in three years?
Bring everything to today's money first. Rs 100 promised by a friend in three years is worth less than Rs 100 now, because you could have invested it and because the friend might not pay. The recap path delivers Rs 635 crore in total, but Rs 485 crore of it arrives in year 3 and is worth only Rs 327.4 crore today at 14%. Exit value is 9x Rs 65 crore, Rs 585 crore; less Rs 100 crore of remaining debt leaves Rs 485 crore for the family. Add the Rs 150 crore dividend and the path is worth Rs 477.4 crore against Rs 500 crore for selling now.
Step 2How fragile is the answer?
Find the inputs that flip it. The recap path matches the cash offer if the year 3 exit multiple is about 9.5x instead of 9x, or if the family's discount rate is 11.5% instead of 14%. Both are within reasonable argument, which is why the answer is close rather than clear. The recap also depends on EBITDA really reaching Rs 65 crore, 9% a year growth, while carrying debt of 3.0x. If EBITDA stalls at Rs 55 crore, the exit at 9x is Rs 495 crore, equity Rs 395 crore, worth Rs 267 crore today, and the path falls to Rs 417 crore.
| Scenario | Year 3 equity | Value today | Against Rs 500 crore |
|---|---|---|---|
| Plan: EBITDA 65, exit 9x | 485 | 477.4 | -22.6 |
| Exit at 10x, as today | 550 | 521.2 | +21.2 |
| EBITDA stalls at 55, exit 9x | 395 | 416.6 | -83.4 |
Step 3What goes into the 15-minute presentation?
Four slides, answer first. Slide one says the two paths are worth about the same today, with selling now slightly ahead, so the decision turns on what the family wants rather than on the arithmetic. Slide two shows the comparison above. Slide three shows the sensitivity: the recap needs a 10x exit or flawless growth to win, and it leaves a 3.0x levered business in the family's hands. Slide four lists the questions only the family can answer: do they want to keep control for three more years, does the next generation want to run it, and how much would they lose sleep over debt in a bad harvest year. Mention that tax on a dividend and on a sale can differ and needs their tax adviser, without quoting rates.
Close with a view, not a menu. A strong close says: the numbers do not justify taking on debt to wait, so take the offer unless the family has a reason beyond money to keep the business, in which case the recap lets them keep it while taking Rs 150 crore off the table.
Where candidates lose it
The common loss is adding Rs 150 crore and Rs 485 crore, getting Rs 635 crore, and declaring the recap the winner. Money in three years is not money today, and once discounted the comparison reverses.
The second is presenting only numbers to a family. Close values mean the decision is about control, risk and succession, and the interviewer wants to hear you say so in the last slide.
What the interviewer asks next
- The buyer offers 10x now but with 20% of the price paid in year 2 if EBITDA hits Rs 60 crore. How do you value that?
- What would make a lender refuse the 3.0x recap for a spice business?
- How does the answer change if the family's discount rate is 10%?
Company names and figures are illustrative.