Rob Starr, Head of M&A at Shaw & Co, shares his advice on managing offers from potential buyers of your business.
"It can be tempting to simply take the highest bid on offer and head off to the beach."
If you’re selling a business for the first time, it can be tempting to simply take the highest bid on offer and head off to the beach. However, it’s vital to remember that the highest price may not actually be the best possible deal for your business and all the hard work you’ve put into it.
When trying to solicit the optimum price for your business it is also important to remember some of the key psychological aspects that can a drive a deal and push the price up. For example, if the opportunity to acquire the asset won’t be there again (scarcity), then you have the ideal opportunity to engender a ‘fear of missing out’ amongst bidders who will be desperate to acquire your company and will price their offer accordingly.
With this in mind, here are some of the most important things to consider when managing offers from potential buyers…
When selling a business it is not normal practice to issue a guide price or asking price as it is when selling a house. Instead, potential buyers will bid what they believe the business to be worth and it is then for the seller and their advisers to manage the bidders in order to solicit the best offer against predefined (but confidential) criteria.
A business is a very complex asset to sell and acquire so initial offers need to cover a lot more than the headline price. Other key factors to consider include the structure of the transaction, plans for the business, tie-ins for senior staff and the position of the buyer (including proof of funding).
"Clarity should be sought before making any final decisions."
It is important that bidders also explain how they have arrived at their indicative offer price in terms of the valuation basis used and any assumptions applied. This allows offers to be more easily compared and removes any ambiguity. The total consideration should be understood as to whether the price indicated is all upfront or whether the price has deferred or contingent (earn-out) elements. If there is any aspect that remains unclear, then clarity should be sought before making any final decisions.
If the offer prices are based on certain assumptions and differing pricing structure the corporate finance advisor’s role is to explain and to gain clarity on the structure of the valuation. Often bidders will ask for guidance on pricing and certain indications can be given or hurdles that need to be reached if a bidder wants to be seriously considered. If unsolicited offers have already been received this can acts as a minimum benchmark of where a minimum pricing should be.
Finally, where certain bidders may have synergies or where there are obvious immediate strategic gains there is no harm in pointing these out or reminding bidders during the process.
As well as including the basis of the pricing, the advisor should always request bidders to provide details of any conditions attached to the offer. This could include what approvals are required to proceed or an explanation of how a bidders propose to finance the acquisition, and specific requirements for due diligence. More specific questions can be asked of bidders in terms of outlining any future strategy or commercial plans for the business including existing management and employees.
The advisor can provide certain guidance as to what might be acceptable or which factors may put a bidder in a more favourable position. From offers received where it is evident that certain additional information could assist buyers or to guide bidders on areas where each response needs to improve.
Once offers have been compared and those that are most attractive have been selected, as part of a competitive process the advisor will ask bidders for their best and final offer (BAFO). This can be generic or more specific to areas where each bidder needs to improve if they want to become the preferred party selected. The competitive process enables the strongest and most interested bidders to put their best offer forward, like any auction process. Once the BAFO offers have been received the best offer measured against price as well as other key criteria can be selected. It is the skill of the advisor to ensure that the bidders have the right information to fully consider the opportunity and to make sure that no value is left behind on the table.
There is no set number of bidding rounds and should similar BAFO offers be received with little between them, then another round may be required, with competitive tension heightened as parties know they are down to the final three or two. The leaders in the pack can be pointed to where improvements can be made in their offer, or where conditions or process requirements will need to be accepted for them to be selected. Once again providing further information may be necessary to assist bidders, or the competitive process will be sufficient.
Subscribe to receive news updates, Connected Magazine, details of forthcoming events, opinion on issues that matter to you and more.