Anytime someone is trying to sell a company, the first thing they look at is the price the buyer is offering-;whether that’s $20 million, $100 million, or more. It’s all very exciting and it’s easy to get dazzled by the numbers. And I know we all have a spreadsheet calculating the impact on our personal balance sheet of such a price!
But before you get carried away looking at new cars and homes, you need to consider two things that are even more important than the price (not including the terms of the deal, which I’ll cover in a separate article). The problem is that a lot of people who have never sold a company before overlook these two things and get dazzled by the headline price-;and they always end up sorry that they did.
The first overlooked factor is the probability of success. MBAs call this completion risk. What it means is whether the person bidding on the company is likely to actually execute on the deal and bring it to the finish line. It’s important to remember that many deals never get done. That means you’ll waste a lot of time and energy bringing the acquisition forward, only to be left standing at the altar. This can be incredibly frustrating and a giant waste of time.
That’s why it can be a smarter choice to sell to someone who might not be offering the highest price, but who offers the best chance of seeing the deal through. How do you judge this? The best predictor is whether the company has bought companies before. The odds of failure are incredibly high for rookies in the acquisition business (not to mention they are inefficient), with maybe half the probability of closing a deal as compared to someone who has been down that road before. That’s why taking a few dollars less, but greatly increasing the odds that the deal gets done, can be incredibly valuable to you as the seller.
The other overlooked factor is whether the buyer will retrade the deal. What I mean by this is when a less than scrupulous buyer will intentionally make the highest bid - high enough to knock all the other bidders out of the running and clear the room. Then, once you sign your letter of intent to sell to them, the games begin. That is when they find reasons to renegotiate the price down-;maybe because they say your revenue is not as high as they thought, or your customer contracts don’t extend as far as they’d like, or even that your company needs a new IT upgrade. Before you know it, you’re looking at a much lower price for the business. And, because your other bidders have walked away, you’ve also lost a ton of leverage you might have had in negotiating.
Maybe you’re thinking: It’s OK, I’ll go back to the next highest bidder and see if they’re still interested. Good luck, because I’ve seen this before. In fact, it’s happened to me.
Whenever I am the second highest bidder, I always leave the deal friendly. Because I want to be called when the higher bidder starts to retrade the deal. When I get the call from the seller asking if I’m still interested, I know the other deal fell through and that I now hold all the cards. The only way you, as the seller, can get back any of your leverage is if you restart the whole process-;which is something no busy CEO ever wants to do.
So when you think about selling your company, it’s not all about getting the best price. Don’t be dazzled by the highest offer. You need to pay attention to these other factors about the buyer-;the probability of closing a deal and the character of the buyer-;or you’ll end up regretting it in the end.