Why Price Should Not Be the Only Factor When Selling Your Business
Selling the company you’ve built is not as straightforward as selling your car or your house. A business sale spans a much longer time frame, and typically involves multiple parties (especially in an auction sale process). Undoubtedly, you will have varying offers from different parties, and some may lead to more questions than answers depending on the complexity and breadth of offers. Having served as buyer or seller in more than 30 transactions, we can assure you that no 2 offers are ever exactly alike. All of this creates a chaotic environment for sellers as they look to select a buyer.
When evaluating offers, purchase price is obviously crucial for any seller. Everyone wants to sell their company for as much money as possible, and advisors who receive a commission on the sale have a vested interest in the seller going with the highest offer. In many cases, price should be the determining factor for sellers, especially when choosing between widely disparate offers. However, when evaluating offers that are close in price, other priorities can and should factor into a seller’s decision.
One of the most important considerations is the buyer themselves. As a seller, you should look to gain an understanding of each buyer’s culture, values, and the level of trust you have with each to follow through with promises made before and during the transaction (including the price in a buyer’s initial bid). Whether or not a buyer has funds already secured and has a history of successfully closing deals is an important part of this, as it can provide more certainty that your transaction will actually cross the finish line.
You should also spend time talking through each buyer’s plan for the business after closing. Whether you plan to stay with the company after the sale or not, at a minimum, sellers should understand what will happen to their employees and the legacy they’ve spent years building. For sellers who plan to remain at the company and grow it with the buyer, can you envision yourself collaborating with them side by side for years to come, even during challenging times? Is there alignment in terms of how you see the company’s future and their vision? Does the buyer offer any value-add other than capital? Questions such as these are important to think through and may sway a seller towards a buyer who offers slightly less in price but who aligns best with their values and vision.
Even when offers are nearly identical in terms of valuation, there are different forms of consideration as to how that purchase price can be funded that can materially affect the seller. For example, these can include earnouts (where payments are contingent upon meeting certain future metrics), rolled equity (where the seller reinvests part of their proceeds to retain partial ownership in the company going forward), and seller notes (essentially a loan from the seller to the buyer to be paid back with interest). Any of these can result in the cash proceeds in your pocket on the closing day differing from the purchase price agreed upon – sometimes by a large degree. Some sellers may prefer an all-cash offer that is marginally lower than other bids, while other sellers may be excited by the chance to earn a higher purchase price over time through earnouts or rolling equity.
Depending on the transaction details, other nuances may affect a seller’s decision in terms of selecting a buyer. On the structure topic, the amount of debt put on a company at closing may be an important consideration. For some sellers, personal fit between them and the buyer is key. Certain buyers offer the opportunity for the company’s management team to co-invest equity in the transaction and reap the rewards of future growth, and a seller may appreciate this valuable incentive for their team.
In all cases, no one would advocate for a seller taking a significantly lower price as compared to other offers. But, as you navigate the complex transaction process, don’t lose sight of factors other than price that can affect the people involved, the future of the company, and the actual amount of cash you receive at closing.
