In Finish Big, author Bo Burlingham sets out to study what makes a positive business exit and what makes the transition go bad. Why do some business owners look back on their sale as a positive experience while others lay awake at night worrying and wondering how things could have gone better?
Per Burlingham’s research, factors that make for a good exit are feeling fairly compensated, leaving with a sense of accomplishment, feeling satisfied about how their key leaders were rewarded in a sale, having a sense of purpose outside the business, and (sometimes) confidence that the business would continue to thrive and grow.
Of those five factors, three can be sought out and negotiated in the sale process: fair compensation, rewarding leadership, and future business prospects. And the best way to get there, I’d argue, is to bring multiple buyers to the table.
Of companies taken to market by professional M&A advisors, roughly 22 percent received three or four written indications of interest (IOIs) in Q2 2017. That’s according to the latest Market Pulse survey conducted by Pepperdine University on behalf of the International Business Brokers Association and the M&A Source. At Cornerstone, our stats show our lower middle market clients averaged five IOIs.
Multiple offers are a sign of strength in the business market right now. Businesses that receive multiple offers typically sell quickly. More importantly, those sellers walk away from the closing table feeling greater confidence and comfort with their decision.
With multiple offers to choose from, sellers know they’ve identified the true market value of their business. Sure, you can get a professional valuation on your business, but those numbers are still just theoretical. The market always wins.
Of course, purchase price is not always the deciding factor in which buyer gets the deal. It’s not uncommon for our sellers to take the second or even third highest offer, trading out some cash for a buyer that is a better fit with the seller’s vision or the legacy they want to leave behind.
When advising clients, we ask them the rank their priorities beyond purchase price. Many times, sellers tell us they want to protect employee jobs, keep the business in the community, give their management team an equity stake, or simply just keep their name on the operation.
When we know a seller’s priorities, we can communicate that during the sale process, and buyers can shape their offers accordingly. The more buyers in negotiations, the more incentive they have to step up and meet your goals.
There’s a saying we use here: One buyer is no buyer. Yes, technically one buyer allows you to get the deal one, but those sellers are sometimes plagued with what-if scenarios that keep them tossing and turning at night.
“What if I could have gotten more money? Did I explore all my options? Is this really the right buyer for my business?” When you have multiple buyers at a table, those what-ifs go away.
As indicated above, bringing multiple buyers to the table is partly a function of market conditions. The M&A market is strong right now, and demand is particularly high for businesses valued from $2 million to $50 million.
But other factors play a role. Quality marketing, buyer outreach, and a carefully timed sales process all play a role. You want to put the opportunity in front of certain buyers early on and other potential buyers (competitors, possibly) at the last moment. Each deal is unique and different depending on the company itself and the goals of each client we work with.
The goal is to get all the likely buyers to the offer stage at roughly the same time. After that, your advisor can tell you when the time is right to move from negotiation with multiple parties to an exclusive process with just one.
Don’t grant exclusivity too early. Serious buyers will stay in the process even if there are other interested buyers in the mix.
In this market, it’s right to assume you’ll have multiple, eager buyers for your business. And with those buyers comes peace of mind, knowing the market showed you exactly what your business is worth.
