Receiving an offer to sell your business can feel like you have just won the lottery. It's even better if the price is higher than you expected. All those years of hard work may finally be paying off, and you are about to realize your dreams of retirement. It's tempting to move quickly with that prospective buyer, but do not be blinded by dollar signs. The highest offer is not always the best one.
Once you select a buyer, the pendulum of power swings to the buyer. Your ability to negotiate is significantly reduced as you defend and support the price agreed to with that purchaser. Before this happens, perform due diligence about the potential buyer and weigh the following factors:
1. Meet your financial exit goals.
On the surface, the offer price might seem like more than enough to meet your retirement goals. It's key to calculate what your net proceeds would be after accounting for transaction costs, taxes and debts that need to be paid.
Also consider that the initial offer is always the highest possible price that you will receive from that buyer. During due diligence, the buyer might find reasons to reduce the price. Make sure you have enough of a cushion and have considered your net proceeds when assessing the price.
2. Consider the transaction's structure.
The structure of a transaction can affect the amount of taxes you will owe, the cash you'll receive at closing and the timing of your transition from the business. If your goal is to exit the company at the deal's closing with enough cash to retire, you may not want to enter into an earnout transaction, which would pay you over time while requiring you to work under the new owner for a period.
Transaction structures can be complex, but do not be intimidated. Work with your attorney and accountant to ensure you that understand the details of the proposed structure before selecting a buyer.
3. Understand a buyer's assumptions.
Once you accept an offer, the buyer will perform due diligence on your company to confirm the assumptions that drove the price. The buyer’s first goal in due diligence is to confirm the information you provided. The buyer will then identify concerns about your company that warrant reductions in the purchase price.
Understanding a buyer’s valuation assumptions will let you anticipate potential adjustments. If you believe there will be significant reductions in the price after due diligence, you might opt to not accept this buyer’s offer.
4. Weigh if the buyer can close the transaction.
Don’t put yourself and your business through intense due diligence only to discover that the buyer is unable to close on the transaction. In this economy, securing funding to purchase a business is difficult.
If the buyer is relying on bank financing, get a commitment letter from that institution before accepting the offer. Inquire about the buyer’s history of successfully acquiring companies. You want an experienced buyer rather than one with a history of getting cold feet at the last minute.
5. Assess your readiness to move on.
Before you select a buyer and enter the sale process, consider if you're personally ready for the transition. Are you emotionally prepared to give up your business? Do you have a clear vision of what you'll do next? If you can answer yes to these questions, you'll increase the odds of a successful sale and your smooth transition from your business.
I have seen many sellers jump at the highest offer, only to regret their decision. The highest offer may not give you the best outcome. A failed business sale is difficult for an owner to overcome. Consider all aspects of an offer before selecting a buyer. Be patient and keep your goals in sight.