An offer you shouldn’t refuse

An out-of-the-blue offer to buy your business does not necessarily mean that you have to settle for a less-then-premium price. By TOM McKASKILL.

By Tom McKaskill

Many entrepreneurs are quite surprised when a prospective buyer turns up at the door with an offer to buy. Even when they anticipate it might happen one day, the actual event is still surprising.

If a potential buyer does turn up at the door unexpectedly, the entrepreneur must consider whether to entertain the offer or reject it without consideration. Few of us can resist at least finding out what is on the table, and so it is more than likely that some discussion will be entered into. Sometimes this is “just in case” – that is, just is case it is a crazy high offer and you might want to seriously consider it.

If you are a conventional business and if you understand the normal valuation models for your industry, which are usually based on some multiple of EBIT, then it is not hard to work out what a premium offer might be.

If you are a high growth potential business at an early stage of proving your business model and you are hoping for a strategic buyer, you might have some difficulty working out what a reasonable offer might be. Even so, there will clearly be a price where you will move forward with the negotiation. But how do you know you have the highest price you could achieve at that moment in time?

Most acquirers are not in the business of being generous, and they will pitch their price at a point that will just get your interest and secure the deal. If they don’t need to offer more to secure the deal, why should they? Even if you thought your business had greater potential, you still might be willing to settle for a bird in the hand.

Once you have decided that the offer price is at a point where you will sell the business, the only way you can be sure of getting the best price is to put your business into a competitive bid.

When you have an offer, it is unlikely that the prospective buyer will hang around while you start the process of working out who else might be interested and go through the exercise of making contact and educating other prospective buyers.

Most offers have relatively short offer periods – basically take it or leave it. However, if you like the price, then the only way you can move it to a competitive bid is to have the other prospective buyers waiting in the wings. That is, you will have set out some time in the past to pro-actively identify and make contact with a group of prospective buyers with the intention of setting up a future competitive bid. Whether you trigger off such a bid or it is activated by an offer, you need to be prepared for such an event.

An offer often comes with a condition of exclusive dealing, however, this is normally done so that the prospective buyer doesn’t waste their due diligence time and costs.

If the business is already prepared for due diligence and the prospective buyers already understand the potential in the business, the vendor can hold off on due diligence until more prospective buyers are in the frame. Then only the highest bidders will be invited to undertake a limited due diligence to arrive at a preferred buyer.

Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia.