How to evaluate an offer to buy your business.
How to evaluate an offer to buy your business.
By Alex Dodgshon

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How to evaluate an offer to buy your business

TAGS:  Business Valuation Methods, Freedom Point, Maximising a Business Sale Price, Negotiating with Business Buyers, Sellability, Selling a Business, Strategic Acquisition

Congratulations, you’ve received a formal offer to buy your business! What happens next? How do you know whether the offer you’ve received is offering the best value and terms for you and your business? Evaluating an offer takes thorough due diligence, good communication and careful consideration. It’s not like accepting an offer to buy your house. There’s a lot more at stake.

Getting the best price when selling your business is critical. Your retirement, your next investment, and your family’s future could hinge on what happens next. But it’s not all about funding your future lifestyle. As a business owner you may also feel under pressure to do the right thing by your staff, customers and suppliers.

In this blog we’ll explore what to do when you receive an offer to buy your business by sharing three important areas of advice, as well as what to do if you find yourself in the lucky position of receiving more than one offer.

Our first piece of advice is to…

1. Stay in control at all times

If a buyer senses that you are unprepared for negotiation or unclear about what you want to achieve from the deal, it won’t fill them with confidence. In fact they could feel uncomfortable and walk away. When considering an offer to purchase your business, confidence and good communication are key to staying in control. Openness and transparency show buyers that you are a credible business owner who’s serious about selling.

Confidence also comes from having a clear plan. Decide in advance the areas you are and are not prepared to negotiate on. Knowing where you stand, for example on granting a buyer exclusivity, means you can respond efficiently when asked. If you have done your preparation and know what sale price and deal structure you want to achieve, this will put you in a more powerful position to negotiate.

Don’t feel pressured if a buyer tries to impose their own timescales on you. Your business is your asset. It’s normal to want to take a reasonable time to come to a decision. Whether or not to accept their offer is your choice. Accepting an offer in haste or that you don’t believe is best for your business can never end well. One word of advice – if you feel you need extra time for consideration, keep the lines of communication open so the buyer understands your mindset.

With all this said, compromise is key to agreeing an offer, so don’t dig your heels in on terms that you are able to bend on.

2. Understand the buyer’s intentions

The only way to truly understand what a buyer wants from your business is to ask. Here are a few key questions to start you off:

  • What’s their motivation to buy your business?
  • Why have they chosen your business over another?
  • What needs do they think your business will satisfy?
  • What’s their preferred timescale for completion?
  • Do they expect you to remain in the business post sale?

This last question is especially important if it has not been addressed in the buyer’s offer. In small and medium-sized businesses vendors are considered much more valuable than in a large corporate due to their vast business knowledge and intense involvement. In some business sales the buyer may ask the vendor to stay on to ease the handover process or offer the vendor a consultant position as part of the sale agreement.

3. Assessing and evaluating an offer

When it comes to weighing up an offer to buy your business, firstly you need to assess whether the buyer’s valuation matches yours. If there’s a gap between the two you must be able to justify your own valuation to begin negotiations. This is where proper planning and preparation really show their value. You may need to offer some flexibility, but after negotiation if the gulf between two offers is too great, don’t be afraid to walk away from the deal.

Another aspect of negotiation is the possibility of restructuring the deal to meet requirements on both sides. This could include introducing seller financing, building in terms around future business performance, or restructuring for tax reasons.

Digging into the finer details of the deal’s terms is part of carrying out the due diligence process. Things to look out for include:

  • Is the buyer requesting deferred or earn out terms?
  • How much is deferred? What are the terms?
  • When will you get paid?
  • Will you retain your intellectual property after the sale has completed?
  • How will staff be affected? Will their roles be secure?

What to do if you receive more than one offer

Lucky you! Receiving more than one offer is a sign that your business is sought after and puts you in a strong position to negotiate the best deal, but it can also confuse matters.

When you have multiple offers on the table you’ll need to obtain information and data, universally from each potential buyer in order to make a clear and fair comparison. You can’t compare offers seriously if you have different information from each party. Request the data you need in a consistent format so you can compare and contrast more easily. You should be able to analyse the offer data and payment timescales of each purchasing business to decide whether they are the right fit for yours.

Bear in mind that if your buyer is relying on finance to make the purchase of your business, it helps to know if they are pre-approved by their lender. Factors like this influence the length of time it will take for an offer to reach completion.

Use an exit consultant for professional support and advice

Nobody understands the process of buying and selling a business like an exit consultant. We are emotionally neutral, provide a fair and balanced view of evaluation and negotiation, as well as support with the all-important planning and preparation before you get there. An experienced exit consultant will be able to spot potential loopholes in a deal, help to resolve problems and smooth out the exit process. Book a free discovery call to explore how we can help smooth and support your business exit.

Further reading

How to get the best price when selling your business

The Olympic task of planning to sell your business

Why NOW could be the right time to sell your business

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