How Do I Evaluate Multiple Offers in a Business Sale?

Navigating a Multi-Buyer Situation for Your Business

If you are fielding multiple offers in a business sale, it is important to keep a sober perspective and to work toward strengthening your final agreement. As the seller, you probably have greater leverage in a multi-buyer situation, but that does not necessarily make it an easier sale.

Every new actor will add complexity to the evaluation. You will likely experience a more demanding due diligence process and negotiation period. Handled properly, however, multiple offers create opportunities for a bidding war. On the other hand, you also run the risk of appearing greedy, wavering or unrealistic.

Evaluating Offers with Similar Terms

In the simplest case, two or more potential acquirers will offer substantively identical terms, except with differing purchase prices. Your task as seller is fairly simple in that case; as long as you judge the higher offer to be at least as likely to close as the lower offer, you will most certainly accept the higher offer.

In the real world, however, terms (the specific legal structure and purchase method built into the offer) other than price commonly vary from offer to offer. This means that you commonly cannot make an “apple to apple” comparison between competing offers.

It is impossible to determine how similar competing offers are without a detailed review of the purchase agreement. Even if your attorney prepared the initial draft, it is likely that each potential bidder will propose changes.

As you and your attorney consider, and potentially negotiate, competing offers, you should also consider whether you can persuade one potential buyer to increase their price. At the same time, two key considerations (one was mentioned above) are:

• Likelihood of each buyer closing
• Likelihood that each buyer will not breach post-closing

Consider the Soft Elements, Too

Even though it can be time consuming, it is easier to be objective and straightforward when evaluating price and purchase agreements. These are the “hard” elements in a multi-offer negotiation, and it is easy to make an apples-to-apples comparison. Other, softer elements should be considered when evaluating multiple offers in a business sale, and these may be particularly important if you feel pride for and emotional attachment to your business.

Motivation matters. Motivated buyers are more likely to close and less likely to drag their feet. Motivated buyers are less likely to balk at counter offers or take offense if you consider another acquirer’s proposal. Ask questions like, “Why do you want to buy the company?” Or, “What are the most attractive elements about the business?”

Motivation is inextricably tied to intent, which can vary based on the type of buyers. If you own a smaller business (value up to $3 million to $5 million), buyers may view your company as an income vehicle rather than an investment. Buyers may be corporate salesmen or middle managers who want an established staff and customer list. If you own a lower-middle market company (value between $5 million and $50 million), you’re more likely to run into synergistic buyers, venture capitalists or private equity groups. Buyers in this market may be more qualified.

Can you trust the integrity of the offer? Certain buyers may come across as less than honest or otherwise potentially litigious. A competitor might just want to clear space in the market, or even engage in negotiations simply to look at your books and intellectual property. Lean on your transaction team to safeguard against uncertainties.

Soft elements fall outside the four corners of the purchase agreement. Make a conscious effort to identify them; they’re critically important. After you do, you may find that taking the smaller offer is the correct decision.

Evaluating Offers with Different Terms

Purchase agreements generally share certain provisions and terms, but the specifics may differ in ways that really matter. For instance, Buyer A may request that you stay on as a minority owner or board member to help with key employees, while Buyer B prefers a clean slate and may be eyeing significant staff changes. So Buyer A might entice you with an equity stake in its business. Buyer B might compensate with a higher purchase price.

The point is, multiple offers in a business sale are likely to come with complicating provisions that make an apples-to-apples comparison challenging. You could run into, among other things, differences in the closing conditions (e.g., whether there is a due-diligence contingency or seller financing), reps or covenants buyers ask for.

You want to avoid becoming mesmerized by a single provision—don’t be a single-issue seller, in other words. Each deal needs to be evaluated in its entirety. This can certainly be challenging, but it’s absolutely necessary if you want to reach a strong final agreement.

Playing Offers Against Each Other

It takes skill to navigate multiple offers in a business sale, but, again, if done well a bidding war can ensue. At a minimum you may be able to use the existence of other offers to improve the purchase agreement you ultimately accept. For example, you may like provisions x, y and z from Buyer A, but everything else is better in Buyer B’s agreement. Use Buyer A’s presence to see if Buyer B will introduce terms similar to provisions x, y and z.

Again, lean on professional M&A intermediaries whenever necessary. If you already have multiple offers, chances are good you’ve already retained an advisor. Very few companies receive multiple unsolicited offers at the same time, especially among smaller or lower-middle market firms. Work in concert with your business broker or investment bank. They should be excited at the prospect of playing multiple offers against one another.

Never Lose Sight of Your Goals in a Business Sale

Choosing from multiple offers in a business sale should help accomplish one or more of your life goals. Maybe you want a new challenge and want to use the proceeds to fund another venture. Maybe you are tired of the risk and time commitment and are ready for a less active work life.

Suppose you want the windfall to create a comfortable retirement for you and your family. There are ancillary considerations (how much do you care about legacy, other employees, etc.), as well. Ideally, your final purchase agreement contains all of the elements you need to accomplish your goals.

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[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Negotiating an M&A Deal and Roadmap to Selling a Business or Taking on Outside Investors. This is an updated version of an article originally published on June 29, 2016.]

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