Given that a very high proportion of businesses fail to achieve a successful sale, business owners might be tempted to buck the trend by accepting any offer that comes in. However, simply saying ‘yes’ to an offer because it happens to be on the table is hardly advisable if you can get a better price or improved sales terms by holding out a little. The trouble is, how do you know when it is the right time to accept the offer that is in front of you, when to negotiate further and when to turn it down outright?
The answer is that there is no hard and fast rule to this common business dilemma. Sometimes it can be better to stick with the current offer because of your personal or market circumstances. On the other hand, you could gamble on waiting for a better offer to be generated and subsequently experience a long-term regret that you should have sold up sooner.
Let’s take a look at some of the commonly faced issues that inform many business sellers’ decisions on whether to stick, fold or twist.
Many of the failures to sell business seen across the UK stem from issues surrounding the expectations carried by proprietors. These can take various forms, but are especially noteworthy surrounding the matter of business valuation. The other primary issue is the expected number of interested parties which can be vastly fewer than is desirable, particularly in niche business markets which are outside of the mainstream interest.
The first thing to do is to really bottom out your business’ valuation. Consider how this has been done, especially if you undertook your own valuation rather than having an independent valuer provide it for you.
In many cases it is rare that an offer will meet the business owner’s expected sale value for their company. This can be because proprietors expect that the offer figure will be based on their turnover, rather than net profit. Another problem with realism concerning potential offers is that company directors cannot see all of their business’ faults, whether operational or strategic. Yet, buyers are usually very skilled in noticing potential problem areas or risky parts of the business, and this produces a negative effect on the value of offers being made.
An all to frequent issue is that an unscrupulous sales advisor – perhaps one without the necessary market experience in the particular field – has given an over-inflated valuation in order to secure business. Rather like an estate agent overvaluing your home, this can lead to much frustration with little interest being shown by potential buyers.
Lastly, it is important to remember that buyers are valuing any business they take an interest in purely on its ability to generate growth and profit as a trading enterprise – they won’t have the same emotional attachment as the business owners, who have often spent years building up their enterprises. Again, this is reflected in the level of offers made.
The truth is that most business owners fall into the trap of setting their aspirations too high, sometimes because they respond the headlines of ultra successful buy outs of start up companies. Remember that these notable successes are the exception, not the rule. However, it is not all about setting your sights lower and accepting a price that you think in unworthy of all your efforts. Far from it! As with all deals in business, a certain balance needs to be struck.
When buyers come in to make an offer for an SME, they will often start with a low offer as an expression of interest. After this, they will frequently work upwards in terms of the amount that is offered. The gap between where they might settle and their first offer can sometimes be surprisingly wide. However, you cannot assume that an offer, once rejected, will be increased, and every potential buyer has their limit. Remember that turning an offer down could be an error if your buyer subsequently pulls out just because you were trying to squeeze a few more pounds out of them.
Buyers want to pay at what they assess the market rate to be as a maximum. To obtain a deal where you are experiencing a limited amount of interest, accepting a below market rate offer may be the only way to finalise a sale. The amount of activity in the business acquisition market for your company’s sector will give you an indication of when to hold on for a better offer and when to accept one. For this you really need good professional advice which can take in a wider picture on your behalf, not just the focus which you rightly maintain on your share of the sector in your locality.
Business owners wanting to sell often have visions of buyers lining up for their business, such is their sense of its irresistible allure. However, the reality for many is very different. At any one time in the business acquisitions market there are many more sellers than buyers. In the region of a fifth of all business put up for sale go on to ever exchange hands. So, remember that if you receive a credible offer, even one that is beneath your initial expectations, then you have done well.
When weighing up an offer ask yourself if another buyer is on the horizon that might drive up a sales price. If other buyers are in the offing, then consider whether they are genuine prospects or merely window shopping. If you are unsure, then take professional guidance from a sales advisor who is used to profiling buyers and sorting the wheat from the chaff, so to speak.
If you can realistically expect more buyer interest, then use it to generate competition and an increased offer is entirely reasonable to expect. On the other hand, waiting for one buyer to come back with an increased offer when there are no other better options around can lead to disappointment and no sale in the long run.
Difficulties in knowing when to accept an offer are not limited to SME’s by any means. Bear in mind that large corporations face these problems too. For example, Verizon acquired Yahoo in July 2016 for $4.8bn, but this was only after a substantially larger offer – around 10 times as big – had been rejected a few years earlier. No one can be sure they have maximised their sale price. All you can do is get the best terms you can manage at the time.
Whatever your particular situation, seek experienced independent advice. Advice from ‘within the trade’ can be loaded or off-target, so an experienced independent advisor is really the best option. Not only can they help you to achieve the best sales price, but they can negotiate the rest of the sale terms favourably, too.
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