Why should you look before you leap?
For any entrepreneur, receiving an offer on their business from an interested buyer can be both exciting and flattering.
But there is good reason for sellers to be cautious. Accepting an initial bid on impulse could ultimately mean missing out significantly, since the first offer is rarely the best.
You may ask, how much could I lose by accepting the first offer?
Since the calculation of company valuations can be more of an art than a science, it can be difficult to say with certainty. But the experts at Clearwater Growth know from years of experience negotiating successful deals just how large the gap from the lowest bid to the highest can really be.
Rob Britton, Partner at Clearwater Growth says, “When you are selling your home, you usually react to an initial offer by countering – even if you have not received any other offers on the property in question.
“Selling a property is certainly not the same as selling a business, however property sellers and company sellers may similarly be overcome by temptation and accept an offer too soon. For those selling a business, this can have dire consequences – creating a competitive tension is key.”
Selling a property is certainly not the same as selling a business, however property sellers and company sellers may similarly be overcome by temptation and accept an offer too soon. For those selling a business, this can have dire consequences – creating a competitive tension is key
Rob Britton, Partner at Clearwater Growth
Highest versus lowest bids.
For entrepreneurs and owner-managers, their business often represents a lifetime of hard work and personal sacrifices. Thus, achieving the highest possible sale price couldn’t be of greater priority.
In our experience, the lowest bid made on a company can differ significantly from the highest – by up to 100% or more. That’s because company valuation can vary drastically from one buyer to the next, even when they have access to the same information.
So, why is it that company valuations differ so greatly?
The reality is that the process of company valuation has changed significantly in the past 50 years. At one time, companies were valued based largely on the machinery, factories and similar physical assets belonging to the business. However, many of today’s companies are emphatically dependent on innovation, information, and people power, rather than on physical assets.
Furthermore, valuations are increasingly based on future prospects as much as the historic performance demonstrated by the company. Beliefs into the company’s potential and what it may achieve in the future are crucial to its valuation and because the future is subjective, company valuations are too.
Rob Britton adds, “Buyers will interrogate whether or not the growth the company has recently experienced will be sustainable further down the road. They will question whether its products will still be in demand three or five years in the future, the likelihood that the business will lose market share to competitors, and whether the business will remain profitable amid future economic shifts. Although it’s possible to get an idea, there is no absolute certainty and that’s why an ‘accurate’ valuation is so elusive.”
Red flags to watch out for.
Entrepreneurs should be aware of a number of pitfalls which can indicate that the valuation or terms of their deal may be less than favourable. These include:
Non-disclosure agreements, or NDAs for short, are a legal framework long used to maintain trust and prevent crucial information leaking out where it could undermine the profitability of the business. It is important for entrepreneurs considering a sale of their business to seek the protection of a NDA. However, if a buyer demands an NDA and requires that you do not discuss the deal with anyone else, this could signal that the bid is too low. You should always reserve the right to speak with a third party, such as an advisor, about the suitability of the deal and terms.
In some cases, buyers may put forward an offer with inventive arrangements or stipulations. For example, this could include preference shares or additional conditions and considerations. This could be an indicator that bids are being “dressed up” to appear more than their actual value.
Lowering the bid after due diligence.
If the company sale is of a high value, the buyer is likely to conduct an evaluation of your business which is quite extensive. After this process is complete however, the buyer’s next actions can put you in a challenging position if they insist on lowering the bid. This can put the seller in a difficult place, having already invested a large amount of time and energy on a single buyer, with no others in the running.
A good advisor by your side can help you to recognise pitfalls which may present themselves throughout the transaction process.
If you have received a bid on your company, or are thinking of selling your business, please contact our team to discuss your circumstances and objectives.
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