Five Times it’s Best to Take a Lower Valuation

When the time comes to sell your business, most owners always assume that the best decision they could make would be to go with the offer that has the highest valuation. As someone whose compensation is typically based on the size of the transaction, it surprises clients when we make the recommendation from time to time that they go with an offer other than the highest valuation. We believe it’s especially important for owners to strongly consider offers outside of the highest valuation under one of the following situations:

  1. Organizational culture plays a critical role in the long-term success of mergers and acquisitions in general, but it is critical when the owner and other essential personnel intend to stay on with the new organization to realize the full potential of a transaction valuation. The last thing an owner wants is to jeopardize their relationship with their future partner (or boss) and consistently bump heads during strategic discussions. As such, going with a slightly higher valuation may not be worth the future headaches and may not be realized if the issues become too severe.
  2. Longevity of the business may be important to a seller, and the degree of importance will factor into the overall value of a transaction. If you as the owner or a family member plan to stay on with the business for the foreseeable future following a sale, then you want to know that it has the potential to survive the test of time. Certain industries and market segments within an industry have greater levels of concentration, and if you aren’t growing rapidly enough, then you could find your business without clients if a shift towards larger, national competitors is taking place. If you find yourself in a situation like this, then it may be better to go with a slightly lower offer from a strategic buyer as opposed to a larger offer from a financial buyer.
  3. Very few of us would categorize ourselves as a modern day version of Ebenezer Scrooge who prioritizes wealth above all else. That said, I could be wrong. Assuming you aren’t striving to be thought of as a Scrooge someday, giving a bit of thought to the implications of a particular buyer on your employees future may be a worthwhile endeavor. The unfortunate reality is that some buyers are more inclined than others to eliminate a significant amount of overhead from an acquisition through layoffs and other downsizing activities while integrating everything else into its existing infrastructure. Depending on the terms and structures of the offers on the table, you may select an offer that provides greater stability to your employees.
  4. The ability to consummate a transaction is essential to the seller realizing the greatest potential value and, unfortunately, not all offers come through as indicated during initial discussions (especially if your advisory team let you down). This reminds me of a story I heard from another advisor about a transaction gone wrong. He told me about how he was representing a client in the sale of their business and a newly formed private equity firm came in with a “stupidly strong offer” on the business that his client quickly accepted. Nearly 12 months later, the transaction still hadn’t closed and it looked like the private equity buyer was on the verge of breaking loan covenants, funding for the transaction was never going to materialize, and they would have to go back to market. The old adage, “if it sounds too good to be true, it probably is” still holds true today, and a seller and advisor should carefully assess any offers that significantly deviate from expectations on valuation and other offers.
  5. On paper, two offers could seem more or less the same in nearly every way (type of buyer, plans for the business, ability to get the deal done, etc.) but you find yourself liking that je ne sais quoi about one offer over the other even though it’s a little less than another offer. Perhaps this feeling is just the opposite of the previous situation. At the end of the day, you need to feel good about your decision to move forward with a transaction since it will be the single most important event in your life (sorry husband, wife, kids, family, etc.), and worrying that you made the wrong choice for a little more money is never a great feeling.

Although we strived to cover a good range of situations related to times where a seller may want to consider a lower offer, I am sure we didn’t identify them all. It’s also worth noting that we would never advise our clients to take less than a fair market value for their business and taking the offer with the highest valuation may be the best possible choice in any situation. At the end of the day, we believe the best thing to do is present our clients with all of the options available to them so that they can make the most informed decision.

Please contact us at hq@kaulkin.com if you would like to share your experience with a transaction where you elected to take a lower valuation, or hold a confidential discussion on your current transaction advisory situation.

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