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, you must keep a sober perspective and 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.

Challenges of a Multiple Offer Sale

Every new actor adds complexity to the evaluation. You will likely experience a more demanding due diligence process and negotiation period. If handled properly, multiple offers create opportunities for a bidding war. On the other hand, you also run the risk of appearing greedy, wavering, or unrealistic. So, how do you handle multiple offers?

Evaluating Offers with Similar Terms

In the simplest case, two or more potential acquirers may offer substantively identical terms (the specific legal structure) but with differing purchase prices. Your task as the 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, terms other than price vary from offer to offer. You cannot make an “apples to apples” comparison between competing offers.

Determining how similar competing offers are is impossible without a detailed review of the purchase agreement. Even if your attorney prepared the initial draft, it’s 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. You need to be aware of two key considerations: the likelihood of each buyer closing and the likelihood that each buyer will not breach post-closing.

Consider the Soft Elements

While 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.

Softer elements should also be considered when evaluating multiple offers in a business sale, and these may be particularly important if you feel an emotional attachment to your business.

Motivation Matters

Motivated buyers are more likely to close and less likely to balk at counteroffers 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 of my business?”

Types of Buyers

Motivation is inextricably tied to intent, which can vary based on the type of buyers:

• Smaller businesses ($3 million to $5 million) tend to attract corporate salesmen or middle managers, who view your company as an income vehicle rather than an investment.
• Lower-middle market companies ($5 million and $50 million) are more likely to draw synergistic buyers, venture capitalists, or private equity groups.

Integrity

Can you trust the integrity of the offer? A competitor might 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 significantly 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, but buyer B might compensate with a higher purchase price.

The point is that multiple offers in a business sale will likely come with complicating provisions that create challenges. You could run into, among other things, differences in the closing conditions (such as whether there is a due-diligence contingency or seller financing), representations, or covenants buyers ask for.

You want to avoid becoming too stuck on a single provision and becoming a single-issue seller. Each deal needs to be evaluated in its entirety. This can certainly be challenging, but it’s necessary if you want to reach a strong final agreement.

Playing Offers Against Each Other

Navigating multiple offers in a business sale takes skill, but a bidding war can ensue if done well. 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 some provisions 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 from Buyer A.

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 simultaneously, 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 your life objectives.

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. You should also consider questions of legacy and how this will affect the treatment of the other employees.

Ideally, your final purchase agreement contains all the elements needed to reach your goals.

We think you’ll also like:

1. Seller Financing When Selling A Business
2. When Should a Seller Sign a Letter of Intent?
3. How to Find the Right Business Buyer for Your Company

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. What’s it Worth? Valuing a Business for Sale
2. Post-Closing Issues: Integration & Potential Buyer/Seller Disputes
3. Valuing Your Brand and Other “Soft” Assets

This is an updated version of an article originally published on September 3, 2020.]

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