More and more business owners, these days, wait for the perfect time to sell their businesses for a good price. When that time comes, they will most likely their businesses for top dollar.
Would you rather sell your business for $14 million or $10 million? Most people would not hesitate to say they will take $14 million. However, accepting the highest offer isn’t always the right move. Today, we will try to explain why accepting the highest bidder is not always the best idea.
Whenever you receive offers higher than what you expected, always remember that it will include taxes and other legal requirements that lower the possibilities of getting paid in full. Moreover, half of these deals never get completed after a handshake agreement between buyer and seller.
To get the best deal, you need to dig deep into the details and find out the requirements to maximize your transaction. When you ask these questions before you accept the top bid, you may end up happier and with more money when you accept a deal from a lower bidder.
How much cash will I get paid up front?
In some cases, buyers usually don’t pay the entire purchase price. Whether they can afford the amount or not, buyers minimize the risk when they do not pay the full amount. Oftentimes, bidders negotiate a deal where you’re only getting a small amount of cash up front, that range between 20% to 30% of the asking price. As the seller, you must act as a bank to help finance the buyer’s purchase. This is called “seller carryback.” If the new owners later take out a business loan, which is secured debt, you will be in a risky position. You will only be able to collect your loan, which is unsecured debt, after the secured debts are paid. The upshot: a sky-high offer that you have to finance may not be as great as a lower offer from someone who can pay you now.
Buyers often try to negotiate with you when you want to get paid in full. For instance, they might agree to pay the total only if all of your customers, key managers, or sales people stick around as well as maintaining the product line and keeping sales level the same. Think very hard about whether or not you can realistically comply with their demands before you agree on a final payment.
Let’s suppose you’re focused on getting top dollar for selling your business. You accept the $14 million offer, only to find it’s structured in a way that the proceeds will be taxed at the ordinary income tax rate of 40%. This is done to give the buyer better tax treatment to justify the higher price. Meanwhile, you passed on a $10 million dollar deal that was structured to be taxed at the capital gains rate of 23%.
Once you pay taxes, the $10 million offer will net $7.7 million, while the $14 million deal will net $8.4 million. However, to get the $14 million deal, you agreed to a bunch of gunpoint contingencies that later make you wake up screaming. You realize you only netted an additional $700,000 after taxes because of poor structure. This is an example of why selling at a higher price is not a good idea.
It’s easy to be so dazzled by a big offer. If you’re selling to a big company or a private equity firm, some might ask you to stay on board for two years or more – and no matter what they say about autonomy, you won’t be the boss anymore. Most sellers get tired of working for a new owner after around 18 months – especially if the new buyer is more focused on profits than customer service and retention than the seller. This can happen instantly when there is a cultural gap or difference in management styles between the new and old owners. Two years is a long time, and picking buyers who are as like-minded as you – even if they made a lower bid – may be smarter decision to make.
Some corporate buyers’ modus operandi is to slap their name onto new acquisitions immediately and bring in their own managers to spread their corporate culture. Why? They don’t want any competition in a local market so they buy their rivals, but believe the acquisitions will be stronger if they carry the corporation’s brand name.
You may understand how they feel from a strategic perspective, but it still can be agonizing to watch somebody paint its name over your logo if you have spent 25 years of your life building your brand. Some buyers are happier going with a lower bidder who agrees to keep the business intact. You may think you’re ready to take the money and run. However, the additional $4 million you gross, which amounts to an extra $700,000 after you pay taxes and transaction costs, can lose its value quickly when it means destroying something you spent your whole life creating.