The offer you initially accept from someone looking to buy your business is anything but final. Whether it is in writing or part of a Letter of Intent (LOI) or verbal, that offer is subject to negotiation as the selling process advances. Any potential buyer will need to perform a due diligence investigation before entering into a final agreement to buy your company. Many times, interested buyers will strategically make attractive offers just to gain acceptance so they can get access to confidential information about the business. After entering into a tentative agreement, they try to systematically reduce the price based on negative findings during due diligence. Here are a few strategies to get you through this phase of the sale, and neutralize the grind.
Structured Sale Process
Buyers are more likely to be emboldened to use their leverage if they believe they are the only one pursuing the business. You can limit their negotiating power and create competitive tension by using a controlled auction. If you have multiple parties pursuing your business at the same time, you can put them in competition by asking them to bid against each other. This adds an element of fear and risk over the possibility that they could lose the business and helps you to get the highest possible price. This fear tends to give you the edge throughout the sale process, resulting in shorter due diligence and a less aggressive grind, if any.
Hold Bidders to Valuations
The due diligence grind is based on buyers finding things out about a prospective business that do not meet their initial expectations. However, their initial expectations can be very subjective, and based on incomplete information. A buyer who is silent about the assumptions they made when making their original offer have unlimited leverage, as they can always claim that the business falls short of their expectations. Before accepting an initial offer, get an explicit indication of how they arrived at that number. Get full disclosure on the valuation method they used, the metric and multiple they assumed and any additional information they used to formulate their price. This will help to hold bidders to their assumptions about the value of your business and limit the number of arbitrary critiques during due diligence.
It is imperative that you are prepared and have a quick turnaround time when furnishing buyers with information about the business during due diligence. This establishes credibility, shows competence and gives the buyer more confidence in their potential investment. It also keeps positive momentum going and makes the overall process go faster. Sometimes buyers use due diligence to slow down the sale process. This gives them time to look for flaws and reduce the company’s valuation without having to commit any capital. By responding quickly, they lose this opportunity. Don’t do them any favors by taking too long to handle any inquiries.
In order to dictate the pace of the due diligence grind and keep things moving in your favor you need to have thorough documentation and financial statements prepared before you list your business for sale. Make sure all of the information about your business is complete. Acknowledge any outstanding risks or potential concerns and be prepared to answer questions about them. It is important to be transparent. One way or another, everything about the business will eventually reveal itself. It is always better to be proactive and disclose known issues up front rather than risk them killing the deal later on, or opening yourself up to liability after the sale. When it comes to financial reports, make sure they are thorough and organized. Performance forecasts should be realistic and based off of clear evidence and data.
When selling your business, it is important to keep the process moving quickly. Longer transactions make you and your business more vulnerable. The more time goes by during due diligence, the greater the risk that adverse circumstances arise that affect the valuation of the business. Hiring a business broker to manage your transaction will allow you to have a significant advantage in due diligence and negotiations. They have experience in leveraging various strategies that can help protect your valuations and keep deal momentum on your side. This allows you to manage the business, while they manage the buyers.
If you are considering selling a business in Southwest Florida, but aren’t sure about how to handle negotiations, contact Corporate Investment Business Brokers (CIBB). We can help you sell for the highest possible value and handle the sale of the business while you continue to run it, so you don’t have to worry about costly errors. Find out how much you can sell your business for with a free no-obligation business valuation estimate.
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