Any time an owner thinks about selling their business, it's natural that they hope that nirvana occurs: a bidding war. The idea is that the more potential buyers who get involved in the bidding, the higher the selling price becomes. That's certainly the pitch that investment bankers make when they tout their services: their goal is to get you the maximum value for your business by bringing multiple interested parties to the table who are hopefully willing to bid their way into a top dollar offer.

While this does sound like nirvana, the truth is that it's not likely to happen. Odds are that your business might just have one or two interested buyers. The good news, though, is that's enough. Let me explain.

Before you even think about drumming up interest from sellers, you need to start with the basics: you need to establish that you have a recurring revenue, highly-profitable and growing business that has a unique position in the marketplace. If you don't have those elements, you can forget about creating a bidding war--or maybe even selling your company at all.

The other consideration is timing. Just like when someone tries to sell their house, a variety of factors like the time of year, and the proximity of similar transactions can dramatically impact the number of potential buyers interested in your business. Strategic or financial buyers who might otherwise have been interested in your business might not be looking because of a range of factors such as they just made another deal or they have just brought in a new CEO. That's why it can be tricky counting on bringing more than one or two buyers into the equation at any given time.  Some of the best buyers might be out of the market.

The market also sets the price for your business. You can do all the MBA-style valuation analysis you want--from looking at comparable to assets to multiples of EBITDA --but all that does is give you some targets to aim for. In the end, it's the buyer who will tell you what your business is worth.

While we often use the analogy of selling a company to selling a house, it's actually much easier to find the value of comparable homes than it is similar businesses. Hence, a broker can more easily assess the value of your home than a business. There are millions of real estate transactions a year you can use for reference, as well as the property assessment used to calculate your property taxes. That kind of volume of data doesn't exist for companies. Plus, every company is unique in terms of its intellectual property, its customers, and its financials. Just like real estate, where certain geographies are hotter than other with buyers, market sectors also run hot and cold. Right now, for example, software-as-a-service companies and those with subscription models are valued highly. A broker can give you a best guess at the value of your business, but it again comes back to whatever a buyer is willing to pay. The value is in the eye of the beholder.

I recently wrote a separate article that talks about the importance of taking money off the tables when its available. The same principle applies here. While it might be nice to fantasize about dozens of potential buyers fighting for your business--driving the price higher and higher--you might realistically be best off by striking a deal with whatever offer is on the table, even if it's slightly lower than your valuation models tell you. This is especially true if you have an excellent buyer for your firm, with a high degree of certainty that they can execute.

It's similar to what happens in the real estate market. While a broker might tell you that they can help you get top dollar for your home, and they set the asking price sky high as a starting point, that usually doesn't result in drawing in multiple buyers. Rather, if that was your goal, the strategy would be to set a lower price point as a way to create more widespread interest.

In the end, when you decide to go down this path of selling your company, your goal should be just that: to sell the company. If you don't, because you can't find a buyer willing to pay your lofty price, you actually run the risk of damaging the value of the business moving forward. If you bring your business back to the market and potential buyers learn that you weren't able to sell your company earlier, they may discount their offers because they see you as riskier now or you have damaged goods. You lose credibility.

That's why if you get an offer that's even just 92 percent to 96 percent of your asking price, you might want to pull the trigger--or at least negotiate more on the terms of the deal rather than the price. It turns out that 92 to 96 percent of target is just about the ratio that most businesses sell for. You are probably better served find a better buyer or getting better terms.  If you could, say, get more cash up front, or have a lesser commitment to staying on inside the business after the sale, that could be worth a lot to you over the long term.

The key takeaway here is yes, it would be awesome if everyone who goes to sell their company could generate a bidding war that ensures they get the best possible price in the deal. But it's more realistic that you will get just one or two interested buyers--and that can be good enough if you keep your eye on the prize. Otherwise, if you ask for too much, you might just get less in the end

Published on: Feb 19, 2019
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.