BY CRISTIAN ANASTASIU
Most certainly every business owner who has considered selling their business and has received offers has asked themselves: “Is this a good offer?” Leading to the inevitable question of: “Should I accept it?” Often during an engagement our clients ask us these exact questions: how should an owner evaluate an unsolicited offer, keeping in mind that a “good” offer is different from a “fair” offer.
An offer to acquire a business can be very complex:
- the financial part alone can include multiple components: cash at closing, earnout, note, equity, working capital, etc.;
- then there are many terms and covenants (non-compete, escrow, reps and warranties, etc.);
- and finally, there is the chemistry with the buyer, the cultural fit, synergies, the track record and the probability of the buyer being able to close, the owner’s legacy, the future of the company, its employees and customers, etc.
While many business owners are up to date on comps or market metrics, such as multiple of ebitda or multiple of revenues or discounted cash flow, most have their own opinion of what the business is worth. That is: worth to them. Even when using formulas to determine the valuation, there is room for interpretations, such as what exactly goes into adjusted ebitda, what is the actual recurring revenue, and so on. Couple these statistics with the timing aspect, and the complexity increases.
For example, an owner may think that if they wait a few months or years on accepting an offer:
- the company’s valuation will increase (due to the market conditions, the company performance, etc.);
- the owner will continue to earn salary and dividends running and owning the company;
- and fetch a higher price when selling sometime in the future.
We believe that the question “Is this a good offer?” should be answered by the sellers themselves, depending on how the offer compares to their goals, objectives, and timing.
With this complexity in mind, we address the VALUATION GOAL vs EXIT TIMING dilemma and ask:
Are you targeting a certain valuation for your business and are you willing to wait until you receive an offer matching that amount, even if that means waiting a few more years or longer?
Are you interested in selling now, run a robust sale process, and select the best offer you will receive, knowing that it reflects the current market value of your business?
If you are in the first category, the answer to the question “Is this a good offer?” is relatively simple. Either the offer matches your financial goal or not.
If you are in the second category, which many of our clients are, we suggest you weigh some additional factors before deciding to negotiate, accept, or pass on an offer.
- Is this the best offer we can expect from this specific buyer? Can we improve the offer or did the buyer signal that this is how far they are willing to go? Is there a particularly good fit with this buyer which is hard to replicate with others?
- Is this the best offer we can expect now and in the near term from any potential buyer? How many offers have we received so far and were they in the same range? How long have we run the sale process? What are the market trends? Are your revenues and profitability growing and is that a reason to expect the next offer to be better?
- If the answer to the questions above are YES but this offer is not in the range of what you believe the business is worth, given the market and the company’s projections, how long will it take until we can realistically expect to receive an offer matching your goals? Months? Quarters? Years? What are the odds that you will receive the desired offer within a given timeframe? Are you willing to make the tradeoff of passing on this offer in exchange for a future offer and postpone your exit, maybe indefinitely? What are the implications?
Ultimately how “good” an offer is, is mostly a function of the seller’s expectations. By breaking down the complexity of a decisive question like “Is this a good offer?” into simpler and measurable parts, owners can make a more informed decision which years later they know was the right one.