Andrew Gazdecki is the Founder and CEO of Acquire.com. Former CEO & Founder of Bizness Apps and Altcoin (both acquired).
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Selling your business is partly a confidence game. When you’re confident, you negotiate from a position of strength. You can walk away from deals knowing a better offer is only a matter of time. When your buyer is confident, they may pay more for your business. Why? Because they’re confident of earning a return.
In other words, only two things stand in the way of you getting the acquisition offer of your dreams. One, the number of interested buyers you attract, and two, your ability to reduce acquisition risk. Both are under your control and, with a little foresight and flexibility, can help you close at your ideal price and terms.
Why is it up to you to reduce buyer risk? Shouldn’t you just wait for the right buyer to come along who’s happy to make an offer as is? No. Your job is to convince buyers you’re on their side. Prove you’re easy to work with. Back up your claims with data. Shoulder some of their risk. Clean house. Do everything possible to demonstrate you want to get the deal done, and in return, you’ll maximize goodwill.
Goodwill fuels acquisitions. Without it, your deal is purely transactional. Building goodwill is the only way to maximize your exit while building enough momentum for your acquisition to close. And what better way to build goodwill than by eliminating the obstacles to a buyer acquiring your business? If you reduce buyer risk, you make it easier for buyers to make offers. And the more offers you get, the better your deal.
How To Minimize Buyer Risk
What Buyer Risk Is
Buyer risk is the risk to the buyer of an acquisition losing money. Where a seller worries about a buyer reneging on or reducing their offer, a buyer worries about how to justify the acquisition to themselves, their company (if PE) or investors. Alleviate those worries by negotiating a higher price and friendlier terms.
Price Your Business Strategically
Common sense dictates that pricing below fair market value (FMV) will help you attract more buyers. Your business is seen as a “good deal” because—all things being equal—the chances of a return are higher. Macroeconomic factors like inflation, geopolitical uncertainty, industry trends, regulatory changes and so on all influence the market value of a business, so pricing below FMV only increases that value.
Does this mean accepting a lower offer than your business is worth? No. But if you price strategically—price to maximize interest—you can, in theory, generate enough buzz to nudge your valuation up into a more acceptable range. Doing the opposite—pricing high—is likely to induce the opposite effect. You won’t attract as much interest, will lose leverage in the deal and may need to accept a lower asking price.
Valuing For Today, Not Tomorrow
Financial projections don’t make a business. You can’t predict the future, and neither can buyers. Holding on to a crazy high asking price is just as much of a gamble for you as it is for the potential buyer who pays it. Selling a business is not the same as asking for investment. Price on current performance, not ambitious or aggressive extrapolations, and you eliminate the unknown and will attract better offers.
Putting Your Money Where Your Mouth Is
Convinced your revenue will continue its meteoric rise? You might attract better offers if you apportion that impact to your asking price and make it conditional on achieving targets.
For example, say your growth rate is around 40%. Your current trailing 12-month profit is $2 million. You expect it to be $2,800,000 next year. You’ve priced your business at a market-driven multiple of 2x revenue or $5.6 million.
No one knows if the business will hit its revenue goal next year. If you make a portion of your asking price conditional on your business meeting its revenue goal, the risk falls. The exact portion is up for negotiation, but with skin in the game, you can usually negotiate a better price.
Yes, it will mean a little less cash at closing, but if you’re staying on in the business anyway, at least until the earnout expires, you’re the best person to achieve those goals. Earnouts are increasingly common in M&A because they reduce buyer exposure to an uncertain future. Plus, they incentivize you to stay on and help the business grow—maybe with a little equity for a second bite of the pie.
Clean House
Ever heard the saying, "Tidy home, tidy mind"? Imagine walking into a showhome to find rubbish on the floor, cockroaches in the sink and mold growing on the walls. You’d walk straight out of the door. The same applies to your accounts. Run a finger over all your income and expenses, and if they come back dirty, clean those books! Buyers don’t care if accounting “isn’t your specialty”—hire a pro. Nothing is more offputting to a buyer than aggressive or untidy accounting. What does it say about the rest of your business?
A Quality Of Earnings Report
A quality of earnings (QofE) report assesses the reliability and sustainability of your financial results. For example, are your accounting practices up to standard? Is your revenue repeatable and scalable? Are customers diversified or concentrated over a handful of contracts?
Usually, only the largest and most complex acquisitions require a QofE report or if your potential buyer is trying to obtain acquisition financing. That said, the cost to arrange one can be easily offset by a better offer from a buyer reassured of your company's performance.
M&A is heating up in 2024. To catch the upswing and attract better offers for your business, eliminate the barriers to acquiring it. Be flexible, strategic and prepared for anything. Reduce buyer risk, and you’ll not only unlock a flood of goodwill but also attract a string of acquisition offers that achieve your goals.
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