Four Key Questions to Answer Before Responding to an Offer on Your Business
For many owners, receiving an offer on their business is part of the vision they’ve worked toward for years. A serious, unsolicited offer can be a sign that what you’ve built has lasting value. While the offer is worth celebrating, making the right decision for you and your company requires careful analysis.
How can you determine if it’s time for you to accept an offer? The answers to the following four questions can give you the insight needed to make the best decision:
Is the offer on target?
After you have a formal offer, begin with an evaluation of whether or not it is reasonable. Is the offer high, low, or just right for your company’s value? As the owner, you know more than the potential buyer about your company’s valuation. Be realistic and consider external factors as well, try to independently look at your business without bias. Your decision should be based on not only on today’s value, but also upon whether your company is likely to gain value in the next one to three years. This is a risk versus reward scenario and may involve a significant amount of additional assessment, depending on your view of the industry and underlying business prospects.
External factors worth assessing may include anticipated changes in your industry, advances being made by your competitors and changes in the political landscape. An offer that is lower than desired may be your best option if your company’s future prospects are uncertain or require a substantial amount of work and investment. However, an on-target or high offer paired with anticipated growth may be an indication that you will attract a higher offer in the near future. Consider your risk and factor that into your response.
A key part of your process should be an internal financial review. The analysis is more than an audit, which only looks at one point in time. A full review looks at trends over time and having that comprehensive understanding of historical trends is critical to getting a deal done. There shouldn’t be any surprises for you during the sales process, and definitely none for the buyer. Once you’ve determined that you want to pursue an offer, be willing to open your books and records and be upfront with the buyer.
Does the offer fit your company’s culture?
Not every buyer is right for every seller. Deals can fall apart or be wildly successful based on the fit of the buyer and seller including company culture, industry, product, and employees. Review the buyer’s offer and think about how the company you’ve built will fit within their current business. Do you think you or your employees/customers/vendors will want to work with the new owner? If the buyer is a strategic buyer, are the two companies and products complimentary to each other?
Carefully consider how the deal and subsequent management by the buyer’s team will affect your employees. The offer affects your next chapter as well as their future. Are you comfortable with the inevitable changes in your company culture? Will those changes have a positive, neutral, or negative affect on product development, client relationships, and employees? Issues after the sale with any of the numerous factors involved in your business could affect the bottom line for years to come.
Will the offer provide the right landing for you?
Whether the offer was unsolicited or something you’ve pursued, you will have to decide what your next chapter will be. Will the price provide enough support for you for years to come? Maybe you’re ready to launch a new venture and the offer provides the perfect exit. Or it could be that the offer is just right, but you aren’t quite ready to make a clean break with what you’ve built.
Knowing the right choice for you takes a high degree of self-awareness. Some owners are happy to continue with their companies in a leadership role under new ownership. Others find reporting to others challenging and quickly become frustrated with the new framework and reporting structure.
Talk with your family and friends, and decide where you want to be the day after the deal is done. Make sure that destination is available to you and, if necessary, pass on the deal if you aren’t satisfied with your exit or leadership options.
Does the timing work for you and the company?
Selling your company may be a goal you’ve set for the future. What happens if the offer comes a few years before you’d imagined selling? Spend time determining whether now is the right time to sell. You’ll need to decide how much is at stake if you decline the offer. In addition to your knowledge of your industry, get insight from a professional advisor on the projected outlook for your business before you make a final decision.
There are potential risks and rewards if you decline an offer in the hopes of attracting a better offer in the future. Changes in the political and economic landscape as well as in your industry can make a difference in future offers. While you can’t anticipate every outcome, considering the possibilities based on what you know today can help you make the best possible decision.
Written by Andy Baker, Director at Riveron Consulting
As a Director at Riveron Consulting, Andy Baker focuses on buy-side and sell-side financial diligence projects, as well as CFO advisory services. He has worked in the industry for over a decade in leadership roles, providing accounting and financial services for public and privately-held companies. Andy has deep experience in financial due diligence, investigations, financial statement analysis, internal control reviews, and ad-hoc internal financial models. He also has Big Four public accounting experience and has served a variety of industries including energy, software, distribution, manufacturing, retail, and healthcare.