Does an unsolicited offer to purchase your business have you dreaming about the next phase in life? If so, don’t run out and put a down payment on the vacation home just yet. Attempting to complete a business sale with only one prospective buyer can lead to a host of problems, including leaving money on the table, or worse, a failed transaction.
In fact, if you have received an unsolicited offer, it is a good indication that your business has market demand and would benefit from a confidential competitive auction process. While there are success stories with sales transactions involving one buyer, most do not result in an optimal outcome for the seller.
Here are a few reasons not to conduct a sale with only one prospective buyer:
• No price competition. Competitive bidding will ensure the seller is receiving market value. Many unsolicited offers come from opportunistic buyers bottom feeding. These parties are skilled in luring unsuspecting targets into their traps with promises of all cash transactions, quick closings and minimal disruptions.
Unfortunately, these parties commonly re-trade the deal based on due diligence findings, regulatory issues, lack of financing or some other reason. Often, these buyers pull out at the 11th hour after the owner has invested time, money, energy and emotion in the prospected transaction. In this scenario, most business owners get worn out, frustrated and decide to close anyway, which rewards these types of buyers and incents them to perpetuate their unscrupulous behavior.
• No terms competition. Terms are just as important as price and are often overlooked and accepted as “boilerplate” or “industry standard” by unsuspecting owners and advisers. Professional buyers are well-oiled machines that complete multiple transactions per year and are skillful at incorporating numerous seller representations and warranties that can result in disastrous penalties and post-closing adjustments. After all: it is what you keep in the end, not the headline number, that matters. A business owner cannot compare, contrast or evaluate the terms of a given offer when there is only one.
• No outlier valuation potential. In a competitive bidding process, often a buyer emerges with a different business model, lower cost of capital or value proposition that enables them to offer a significantly higher price. These parties and their respective offers will be lost without a competitive process.
• No urgency. Time is the cause of most failed transactions. With only one buyer, the seller has no leverage to move the process forward. In a competitive process, a timeline with milestones can be maintained and interested parties must move quickly through the process or risk losing the opportunity to one of their competitors.
• No control over the process. A sophisticated buyer will lock in the purchase price and terms. Then, drag out the process by asking for additional information or blaming a lender, governmental entity or other third parties. All while waiting to determine how the financial projections and other risk factors play out over time. Short-term company performance suffers due to the owner and management team being distracted, which results in “new information,” a purchase price adjustment and a sub-standard transaction for the seller.
Feedback from sellers who negotiated with only one buyer varies, but the typical theme is disappointment in one or more aspects of the transaction. Here are few examples of common feedback from sellers who did not benefit from a competitive auction process in their business sale:
• “Actually, our sale process was not much of a negotiation. They just beat me down until I said ‘no.’ The only leverage I had was to walk away, but the acquirer knew I couldn’t walk away because my employees and customers had been notified of the pending transaction.”
• “The last few years running the business had been a grind, and I was burned out. When I received an offer for the business, it seemed like my way out. What was presented as a fast track to close became an ordeal. After a long process, I was worn out and ended up with a large amount of the purchase price dependent on future performance.”
• “I received an incredible offer for my business and the opportunity to participate in an industry consolidation and subsequent initial public offering. A year later, and after I took back possession, nearly 100 of my dedicated employees were gone, there was no cash or receivables in the business and the $35-million backlog had dried up.”
• “We were considering a process but had a pre-emptive offer from a competitor in our industry. We proceeded with the offer, due diligence dragged on and the price was adjusted downward several times. We realized the final price was significantly lower than market, but our competitor knew so much about the business, we had no choice but to sell. We left money on the table.”
Fundamentally, it comes down to working from a position of strength and using leverage to keep multiple parties moving forward in the confidential process. The results: maximum value, favorable terms, the highest certainty of close—and few surprises.
Darin Good is the managing director of Denver-based financial services firm Headwaters. E-mail: firstname.lastname@example.org