Choosing Buyers for your Shortlist pt.2

Steps to Selling your Business Part 30.

In our last post we discussed creating your shortlist of buyers by eliminating prospects based on a lack of certainty of closing. Cutting those who aren’t as likely to close first will save you a lot of otherwise wasted time.

The elimination process doesn’t end there. You will make further cuts as you apply the remaining three criteria: valuation, deal structure, and chemistry.

2. Valuation

After certainty of closing, valuation is critical. How much is each party offering?

This may be an uncomfortable part of the process that can take people by surprise. The legacy of your working life – the company you have built, guarded, and grown – is priceless. When you bring your business to market, you will quickly discover that people are ready to put a price tag on your life’s work, which can be a shock.

Great Advisors will act as real-time interpreters of the valuations in front of you.

It is not simply a matter of finding the four biggest numbers on the spreadsheet and cutting everyone else; deal structure matters.

3. Deal Structure

What sort of deal is being proposed? How much is cash, and how much is in vendor notes? Are the right liability caps in place to protect your company? How much time is involved in the earnout?

Remember, both buyers and sellers are still dealing with imperfect, incomplete information at this stage.

The proposed deal structure from any prospective buyer is only as complete as their current level of commitment and understanding.

Skilled Advisors are capable of gleaning insight from the information the buyer has supplied. If there are questions or severe gaps in a proposed deal structure, your team should reach out and ask the questions that need to be answered that enable you to make a wise decision.

4. Chemistry

I believe that in business matters, the heart must serve the head, not the other way around.

Personal feelings, while valid, must stand in submission to logical thought based on verifiable facts.

You have likely engaged with one or two prospects who seemed to have caught the vision of your company; they get it.

Assessing the chemistry between you and a buyer tends to highlight commonalities in your values. For example, how does the prospective buyer plan to care for your staff post-closing, and how important is this to you?

For some owners, the answer to that question has been a deciding factor between two otherwise equivalent buyers.  

Good Advisors know that chemistry matters in making a decision; great ones will help you think clearly about what you take a stand on.

Holding out to make sure your key staff are well-treated is noble; however, walking away from a buyer because they might take down your grandfather’s portrait in the lobby is likely not.

After carefully weighing these criteria with your Advisors, you should have a shortlist of companies you hope to receive a Letter of Intent from.  The name of your final buyer is very likely included – and you are closer than ever to starting the next chapter of your life.

If you are planning to divest your business or have questions for one of our Advisors, please contact our team today.

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Written by: Douglas Nix