Sizing Up Potential Buyers for Your Business
After weeks of fence-sitting, a few months back you signed the contract and engaged an investment banker to sell your business. It felt like the biggest decision of your life. The day after signing, your newly engaged team of bankers mashed the pedal to the metal and you were carried off with them. The process rolled down the tracks and you just reached one of the all-important stages of the selling process: reviewing offers.
Your investment bankers have been keeping you up-to-date on the process, but they’ve waited to present you with all of the offers in person at the same time. As they slide the packet across the table, before they can get a word in, you immediately flip to the summary page and your eyes dart to the all-important purchase price column.
While purchase price is an important factor, and often the most important, it is not the only factor to consider. An offer is only just that, an offer. It is not a closed deal. To get to a closed deal, you should also consider offer terms and certainty to close, in addition to price.
Deal Terms
There are a myriad of terms that can be listed in an offer for your business. This offer might be called an Indication of Interest (IoI), Letter of Intent (LoI), or Term Sheet. The document name is not critical, but the terms are. Here’s a small sampling of the terms you will likely encounter:
Exclusivity period - length of time you will be prohibited from soliciting other offers.
Due diligence period - length of time provided to the buyer to investigate the investment.
Financing contingencies - what capital needs to be raised by the buyer to close the deal.
Indemnification escrow - how much money does the buyer intend to hold back related to post-closing claims against you.
Contingent payments - how much of the purchase price is based upon future performance and paid out over time.
As you can see, these terms are not immaterial to your decision of which buyer to choose. For example, due diligence periods typically last 90-120 days, in some cases shorter or longer. This makes the choice very important. This brings us to our next topic, certainty to close.
Certainty to Close
It is not uncommon to end up comparing two offers. One is from a group with a strong track record, but the price is slightly lower and the terms more buyer-friendly. The other is from a lesser-known outfit, but the price is higher and the terms are more seller-friendly. What do you do in this scenario?
The Short Answer Is: It Depends.
The larger the difference in the economic value of the offers, the more enticing it will be to consider the unproven group. So it really depends on you. For many owners, the selling process is extremely taxing and the thought of starting over is frightening. This may lead you down the route of the more proven buyer. Another owner might only be happy with the conditions of the higher offer. In this case, you may want to proceed down the less-proven buyer route. In the end, the important thing to know is that it is up to you as the business owner to decide and hopefully, you're advised well enough to consider all aspects of each offer.
Recommended Reading: The Limited Business Valuation: How to Know What Your Business May Be Worth
Are you getting ready to hire an investment banker to sell your business? Are you sure you have the internal resources to manage through the sale process while running your business at the same time? Doescher Group helps business owners exit on their terms. One of our client services is to provide the support necessary for a smooth selling process. If you’re interested, consider reaching out to learn more.
