Company Sales: Evaluation of Indicative Bids
Important when evaluating indicative bids
Selling your business is one of the most important business decisions an entrepreneur or business owner can make. When the process of business sales Once one or more indicative bids have been received from potential buyers, the seller faces a crucial evaluation and negotiation phase. It's a time when many factors need to be weighed in, beyond the most obvious -- the valuation of the company. It's about finding the best overall solution for both you as a salesperson and for the future of the company.
What is an indicative bid?
Interested buyers submit indicative bids based on the information that has been served during the initial discussions and negotiations. The indicative bid is non-binding and gives a first formal indication of what the buyer is prepared to pay and under what conditions the deal could be completed. Indicative bids provide the basis for further negotiations and further due diligence.
Evaluation of indicative bids
When multiple indicative bids have been received, it can be tempting to focus on the indicative bid with the highest valuation. But there are many other factors to consider that can affect the success of the business and long-term outcomes. Below are some essential aspects to weigh in when the seller evaluates and compares indicative bids from potential buyers.
Rating: The valuation is, of course, one of the most decisive factors in deciding which buyer to choose. But it's important to remember that a high valuation isn't always the best solution if other parts of the deal aren't as beneficial. A higher valuation can sometimes come with riskier terms or requirements that may be difficult to meet.
Purchase Price Structure: The purchase price structure is another important factor. It is common for a part of the purchase price to be paid upon admission, while the rest is dependent on future performance, usually in the form of an additional purchase price (in English earn-out). Additional purchase prices are commonly used when sellers and buyers have different views of future earning capacity and are a way of bridging discrepancies. It is important to carefully analyse the specific conditions of the additional purchase price, such as budget and forecast targets, and ensure that these are realistic and achievable.
Reinvestment and continued commitment: It is not uncommon for buyers to require the seller to reinvest a portion of the purchase price in the acquiring company or retain a certain ownership interest in the company to be sold. Examples of situations where the buyer may require the seller to remain a partner are where the buyer does not intend to be active in the company or where the buyer wants some time to get to know the acquired company. In some cases where the seller remains a shareholder, a predetermined mechanism is agreed which gives the seller the right to dispose of the last shares after a predetermined period of time. It is not uncommon for buyers to require the seller to remain operational or as co-owner for a relatively long period, which the seller needs to be prepared for.
Questions that the seller should ask:
- How much of the purchase price has to be reinvested?
- What does continued commitment mean in terms of time, responsibility and decision-making power?
- How long is the seller expected to remain in business, and under what conditions?
Buyer's plans and intentions
Another important aspect to analyze is the buyer's plans and intentions for the company. It is important to understand how the buyer intends to drive the business forward and how this aligns with your own values and vision for the future of the company. If you are eager for the company to continue to grow and develop in accordance with the path you have set out, it is important to choose a buyer who shares this vision.
Questions to ask:
- How does the buyer plan to integrate your company into their existing business?
- What are the buyer's long-term goals for the company?
- Will the company maintain its current culture and management structure, or are major changes planned?
- Will the buyer relocate the business geographically?
Financial stability of the buyer
The financial strength and stability of the buyer is also an important factor. A buyer with strong financial resources and a stable structure is better equipped to deal with any challenges that may arise during and after the acquisition. There is also less risk of the deal bursting due to lack of funding.
Questions to ask:
- What does the buyer's financial position look like?
- Has the buyer made similar acquisitions in the past, and what was the result?
- What guarantees can the buyer offer to ensure that the deal goes through as planned?
Conclusion: It is important to have a holistic view of the deal
Choosing the right buyer is a complex process that requires a holistic approach to the deal. It is not just about choosing the buyer who offers the highest purchase price, but about taking into account a range of factors that affect both the future of your business and your own situation as a seller. By carefully analyzing and comparing the various bids, you can make an informed decision that maximizes both value and security of the deal.
At FLB Partners, we offer expertise and support throughout the entire sales process, from the preparation phase to the completed sale. Contact us today to discuss how we can contribute to a successful business sale.
