John Spence launched a furniture manufacturing business after retiring from a corporate career. Over the years he has grown the business substantially but is now looking to cash out and sell the business. He has solicited bids from several companies and investors and narrowed the bidding down to three finalists.
Bid 1 is from a current employee. He has offered to purchase the business for $8.75 million.
Bid 2 is from a competing company. They have offered an initial price of $8.25 million, with a bonus payment of $1.5 million if certain financial objectives are met in the first year after the transaction closes.
Bid 3 is from a financial investor. They have also offered an initial price and bonus with the same structure as bidder 2. Their initial offer is $6 million and the bonus is $5 million.
John’s believes the company has a 60% chance to achieve the bonus requirements. Do the following
Evaluate the buyout options by constructing a payoff table. Make sure to calculate the expected payoff for each bid and include that in your table.
Which offer should John accept if his decision making criteria is:
Maximax
Maximin
Minimax regret
Highest expected value
Conduct a sensitivity analysis of the expected outcome as the probability of achieving the bonus varies from 0 to 100%. Create a graph and paste into the answer template.