Market Price - When To Accept An Offer
Versus When To Walk Away
Sellers always want to know whether they are being offered a fair value for their company, or if they should just walk away from a potential sale. Typically, one considers general valuation ranges for a business based on multiples of the company’s EBITDA (earnings before interest, taxes, depreciation, and amortization). The multiple will be specific to the type of business being sold and its growth projections. While these multiples may be helpful at first, the true market price of the company is discovered once the bids from perspective buyers are compiled. Clients are often surprised by how close in value the offers are, but it’s because that value range is the market price. Selling a business is a simple example of supply and demand; the buyer’s bids find the equilibrium.
When should I accept a bid?
Accept a bid that comes in at market price as defined by the offers that are received. One trap that sellers fall into is that after the bids are compiled, they decide their business is worth more. While it is always preferable to receive a higher value, sellers must be realistic and honest with themselves about price. When selling anything, there’s always a maximum value that can be obtained. There is no such thing as a dumb buyer that will pay an outlandish amount.
The next key mistake is when the seller decides to hold onto their business, believing that all the potential buyers are wrong about the company’s value. These individuals convince themselves they can keep growing the business and sell it for more in one to three years. Anything can happen in a year or two, and in this scenario M&A is very much like gambling—it’s better to just quit while you’re ahead. Most companies are not going to have high growth rates forever, and eventually the financial projections will not look as promising. Selling a business now while it’s stable is more realistic than expecting a higher value in a few years when the circumstances, including the economy may be very different. And, if there are any “hiccups” with the business, e.g., the loss of a large customer, the business may not even be saleable. The risk of holding is enormous; especially when one considers that most company owners have a majority of their net worth in the business.
All in all, if most of the bids are around the same number, it is advisable to accept an offer and move on. Business owners must understand that there is a good chance these bids are the highest value they may ever see for their company. Blockbuster Video and the music CD business are excellent examples of why business owners should act sooner rather than later.
When should I walk away?
Sellers who are not using an M&A advisor should generally be more cautious when accepting a bid. True market value can only be determined by receiving a number of offers or at least testing the market on a worldwide basis. Individuals attempting to do a deal on their own may not be entirely happy with the offers they have received, which may be the result of only having reached out to a limited number of buyers. It’s unlikely that a small pool of prospective buyers would reflect the true market price for a business. If you feel uneasy about the bids and have not had a professional explore all possible options on your behalf, you should strongly consider whether the offer is worth taking. When selling a company, the seller should be confident that he or she has been in touch with every possible buyer and that to the extent possible, an auction has been established. Anything short of that might portray an offer that is below market value.
Versailles Group is a 30-year-old boutique investment bank that specializes in international mergers, acquisitions, and divestitures. Versailles Group’s skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues greater than US$2 million. Versailles Group has closed transactions in all economic environments, literally around the world.
Versailles Group provides clients with both buy-side and sell-side M&A services, and has been completing cross-border transactions since its founding in 1987.
More information on Versailles Group, Ltd. can be found at www.versaillesgroup.com.
For additional information, please contact
Founder and President - Versailles Group, Ltd.
+617-449-3325
4 December 2016
