evaluating offers

Selling a Business Checklist: Evaluating Offers

by Jim SchleckserFeb 1, 2022Negotiation, Strategy

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Look Beyond the Price Tag and the Term Sheet to Identify the Best Buyer.

There comes a point in every entrepreneur’s life when you begin to consider selling a business. There are plenty of reasons, maybe millions of reasons. Perhaps you’re ready to retire. Or perhaps it’s time to move on and start something new.

Whatever the reason, you might begin, or, ideally, buyers interested in making an offer for your business. That’s a process you might engage an investment bank to help you with or possibly even rely on your staff to find potential suitors.

Once you have established a market for your company, the big question becomes: how do you choose who to sell to?

Look Beyond The Price Tag

Anyone who has gone through buying or selling a business can tell you that it can be easy to get caught up in all the different prices and term sheets that get thrown around.

So many variables come into play, such as whether a company can make a cash offer or if it needs to acquire financing to make the deal. Or will the purchase include an “earn-out,” which means the seller gets some money upfront, but the rest comes over a period of time?

As the seller, it can be tempting to try and simplify the process by just choosing the buyer who offers the most money the soonest.

This, however, would be a big mistake.

While every seller wants to maximize the price of their company, there is another factor they should be weighing even more heavily than that: the likelihood that the buyer will close the deal.

Watch For Last-Minute Nibbles

While it might seem counterintuitive that you, as the seller, wouldn’t choose the highest bidder, you must recognize how emotionally draining selling the business will be. Much work goes into the sale during the due diligence period that follows an accepted offer. There are endless meetings with lawyers, accountants, and tax experts. It’s a grueling process.

In some cases, especially where financing comes into play, third parties like bankers can add to the delays and potentially even kill a deal. I was involved in an agreement where the bankers delayed a transaction by more than six weeks due to endless questions, concerns, and edits to legal documents. They nearly blew the deal a couple of times.

Some buyers use a drawn-out process to their advantage. They might preemptively make the highest bid to clear the room of the competition. Then they’ll turn over every stone and pebble as they do their due diligence. Then, right before the deal is supposed to close, they’ll come back to you with concerns. They might even say those concerns are big enough that they’re now lowering their bid by millions of dollars. But, because you’re so exhausted by this point, you might accept the offer–giving the buyer an absolute steal.

The good news is that you can take a few steps to help avoid this outcome.

Do Your Due Diligence

As a seller, the key is to look beyond the price and term sheets and do your diligence on the potential buyers. What does their track record tell you about the likelihood that you’ll get a deal done using the terms you agree to?

Ask them about what kinds of deals they have done in the past. Do they have a pattern of making last-minute nibbles to change the terms of the agreement? Do they have enough cash to make the deal, or will they need financing to make it happen?

Again, your goal is to get a deal done–and you want to sell to the buyer who has that same incentive.

For example, I had a 100% close rate when I was buying companies. For every offer that was accepted, we closed using the same terms we all agreed to. Whenever I talked to potential sellers, I made them very aware of this–telling them if they chose to sell to me, I would honor the terms of the deal.

As a seller, you should accept nothing less.

Making the Deal & Selling a Business

As you choose potential buyers for your business, remember to look beyond the price tag and the term sheet. Do your homework on the potential buyers and find the one who has a track record of successfully selling a business without dragging them out or changing the terms late in the game.

When you can do that, you’ll come out far ahead in the game.

 

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