What to Do When Your Suitor Starts Slashing the Bid
Excerpts from How to Sell Your Business and get what you want!
You have an agreement in principle to sell for $12 million in cash.
The buyer has been arranging financing and performing due diligence for
eight weeks and makes an appointment to see you. The buyer's accountants
disagree with the way you have treated certain entries, and they think
last year's income was overstated by $350,000 (a similar discussion can
arise from a reduced estimate of the current year's income). Their price
was based on six times the earnings before interest and taxes, and now
they propose to reduce the price by six times $350,000, or $2.1 million.
White-knuckle time. Perhaps you will wish that you had not told so many
of your family and friends about the pending sale. Try to understand the
reasons for the change. Have investors or the bank declared the price excessive?
Much leaks out because there are so many people involved. Now you will
be rewarded for good communications. You should know the key milestones
where a price change could have been triggered: Getting commitments from
investors, board approval, or obtaining a bank loan. Try to figure out
Emotions can boil to the surface when a trusted buyer drops the price.
You might feel cheated, betrayed, or manipulated. You want to tell them
they acted badly -- or worse. Be careful. This buyer had a strong initial
interest. This step may have been forced on the people you've been dealing
with by a superior you've never met, or a banker or an investor. It may
be a ploy. They may want to go ahead at the original price if this move
fails. There is only one way they can find out if you would go ahead at
a price 20% below that in the letter of intent. And they have to appear
to mean it. Restrain yourself: don't say things you might regret. They
may come back and offer 5% below the original price, and you may want to
Now you will be happy if you've told the buyer that other suitors exist.
(Don't mention names -- the unknown are more threatening.) You must let
them know you have acceptable options. You will be happy if you have taken
steps to minimize the feeling among your employees that the deal is a foregone
HOW TO RESPOND. Your answer to the new proposal is that you need time
to think about it. Take at least a week. If they want the deal, they will
begin to sweat -- and you will see signs. Someone will call you. Perhaps
a go-between seeking information on their behalf -- it could be a lawyer
or an accountant. Tell them to stop the due diligence, and remove their
people. If you have another strong buyer, you could ask for all your confidential
papers to be returned. But do not play this card lightly. Alternative buyers
will present new uncertainties, and your best outcome might still lie with
the original suitor.
How valid is their reason for reducing the price? This is relevant.
If you have just lost a customer who represented 40% of your business,
they have a point. But if it is something that has no bearing on future
profits, then they may not. If you conclude that you still want to try
to make a deal with this buyer, take several days to think about it. Then
ask if there is room for negotiation. Some point between their new price
and the original price may seem like a logical place to compromise.
THE ALTERNATIVE BUYER. Recognize that attrition rates are high for acquisition
talks, and keep friendly with all those seriously interested in the business.
Before talks founder, you may sense that trouble lies ahead. The buyer
is expressing concern about the quality of earnings or the prospects for
the business. You feel you're being prepared for a price reduction.
Now it would be nice to know how the other buyer you spurned a month
or two earlier would deal with the issues that have arisen. Find out if
you can -- a broker can do this more readily than you -- how aggressively
interested they are in your business. Some buyers will take the position
that you should finish your talks with the first party before they will
get involved. Others will sense an opportunity and readily jump in and
try to be competitive. Do not rely on what they said a month or two earlier.
Then they might have been pursuing another company, and were therefore
Providing data is key. The second buyer is not going to be able to address
price and other issues without all the information. Your letter of intent
may preclude "talks" or "negotiations" with others. This is a good reason
to have provided data to more than one buyer before entering into a letter
of intent. A shrewd seller I knew had an agreement in principle. He also
had an alternative buyer. He kept sending the monthly financial statements
to the alternative buyer, and kept the parties apprised of where he stood.
He was not negotiating with him, he was keeping him warm. When the first
deal fell apart, he was able to switch to the second buyer easily.
If your first buyer is now suggesting a deal different from that outlined
in the letter of intent, your obligations not to talk to anyone else are
over -- dead. The week or so you take to mull over a lowered price is an
excellent time to have talks with an alternative buyer. This works best
when the alternative buyer has visited you before you signed an agreement
Switching buyers is an emotional wrench for many sellers -- and surreptitious
talks feel unseemly. Do not succumb to the temptation to brag about a second
buyer: if the alternative talks turn out to be fruitless, you'll be weakened.
But leaks occur and may help. If the first buyer still wants the deal,
plans to drop the price may be tempered. Keeping other suitors in reserve,
and acting promptly if the terms of the letter of intent have been breached
by delay or change, is the best protection against price changes.
Colin Gabriel (firstname.lastname@example.org) is a business broker in Westport,
Reprinted with permission from
How to Sell Your Business -- and get
what you want!
Copyright 1998, Colin Gabriel
Published by Gwent Press Inc., Westport, CT
Adapted with permission of the author and Gwent Press.
Title available from bookstores, online retailers, and by calling
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