Someone Wants to Buy My Company

The biggest human temptation is…to settle for too little.” – Thomas Merton

Many business owners decide to sell their company after receiving an unsolicited offer from a prospective buyer. Growing revenues and improving profitability have required their full attention, and they may have never stopped to consider the value they have created in their company. An attractive initial offer may be an unexpected surprise, motivating the owner to consider the sale.

Before an owner inks a letter of intent to sell the company, several questions should be answered:

    1. What is the true market value of the business?
    2. Is the suitor the “best fit” buyer for the company?
    3. What are the critical business terms that directly impact value?

The crucial first step in evaluating an offer to purchase is to understand and compare recent market transactions in the relevant industry. Analysis of public stocks and recent acquisitions of other private companies may yield ratios (multiples of cash flow, fractions of revenue, price to earnings) that can be applied directly to the company in question.

If one buyer finds the company attractive and valuable, most likely others will too. The business may be worth more to the “highest and best” user in the industry. Those buyers will pay a premium over market multipliers for the company. Additionally, the exercise of identifying the best buyers may lead to a bidding environment that drives up the purchase price higher still.

Price vs. Terms

“You name the price; I’ll name the terms.” This saying captures the truth that price is not the only determining factor of an attractive offer. A $20 million purchase price that includes a $15 million seller note paid off over 10 years doesn’t compare with an all cash offer. Likewise, the terms of an employment agreement or a non-compete agreement are all part of the value an owner receives.

The Risk Point

The sales process is grueling, diverting time and management resources away from the operations of the business. Negotiating the final business terms can be contentious and confrontational. This friction represents a risk point to a seller who may be required to remain with the buyer for a period of time. Inserting an investment banker who knows market values and terms can provide a layer of protection on each of these issues.

Selling a company without market knowledge is like flying blind. You don’t know how much you can risk and how far you can push. Market knowledge transfers power to the seller, and provides the greatest opportunity for accessing the personal wealth tied up in a private company.

If you have comments or questions about this article, or would like more information on this subject matter, please contact us.
Michael Poole

Investment Banking
mpoole@pcecompanies.com
Orlando Office

407-621-2100 (main)
407-621-2112 (direct)
407-621-2199 (fax)