A potential buyer has made an offer for our business – how do I know if it’s a good one?
The only way you’re going to know for sure is to run a competitive sale process, generating multiple offers from multiple parties. If you’re not able or willing to do that, then you need some other points of comparison.
First you’ll need to understand how your buyer is valuing your business. It is quite common to reach out to a corporate finance advisor to do some market research.
There’s a lot to think about beyond that headline price. You’ll need to get to grips with the structure of the deal
They can look at the detail of comparable transactions that have happened in your space, where the target company displays similar characteristics to your business. If the information is available, they can examine the multiples of profit paid (or explore other valuation metrics used in your sector). Listed company transactions – where detailed, reliable financial information will be available – also provide a useful barometer on the potential Enterprise Value (EV) of your business. But in any desktop valuation, there are so many variables – including financial periods used to form an offer, adjustments made to published profits, all of which serve to derive the multiple itself. Valuation is an art, not a science.
Crucially, there’s a lot to think about beyond that headline price. You’ll need to get to grips with the structure of the deal, including what proportion of purchase price is paid on day one, whether there are earn-out elements based on future performance targets, if the buyer is going to retain any proceeds to set against any warranty claims until an agreed date, or whether it considers net cash in the business.
Additional questions to consider
You’ll want to qualify your buyer – do they have the financial resources and ideally track record of acquisition to give you confidence they can complete a transaction? Then there’s the cultural fit. Will this buyer deliver the best home for your company, or the best opportunities for your staff?
The answers may be yes. But the only way you’ll know how hard to push back on the offer you’ve received is to know what other parties would be prepared to bid. Considering an offer in isolation is often dangerous – because at the moment, your buyer holds the cards.
View recent BCMS transactions