Why You Shouldn't Sell Your Business To The Highest Bidder

Why You Shouldn't Sell Your Business To The Highest Bidder


Quick: Would you rather get $14 million for your business when you sell or $10 million? Most entrepreneurs would say $14 million.

That isn’t always the right answer. The higher the offer you get, the more likely it is to include requirements that lower your chances of getting paid in full. And often, higher prices come with tax consequences that can leave you reeling like you got hit on the open field by Clay Matthews. That’s why it doesn’t surprise me that BizBuySell, the online marketplace for small businesses, has found that about half of deals never get to closing after a handshake agreement between buyer and seller.

To get the best deal, you need to dig in the details and find out what getting the higher prices requires on your part. Ask these questions before you accept the top bid. You may be much happier in the end with a deal from the lower bidder.

How much cash will I get paid up front? In many deals, buyers can’t afford to pay the entire purchase price at the closing or, to minimize their own risks, don’t want to. They may try to strike a deal where you’re only getting a small amount of cash up front, perhaps 20% to 30%. As the seller, you must take a note secured by the business to finance the 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.

What strings are attached to getting paid in full? Buyers often try to negotiate conditions into the deal you must meet 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, the product lines don’t change, sales hit a certain level, or margins remain the same. Think very hard about whether you can realistically do what they’re asking before you bet your final payment on it.

Will I take a bruising at tax time? Let’s say you are focused on getting the top dollar. You accept the $14 million offer, only to find it is 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 and 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. Now is the higher offer really worth the risk?

Can I work for this buyer for two years or more? It’s easy to be so dazzled by a big offer from Darth Vader Inc. that you neglect to think about how you will feel once Darth is giving you orders.  But that’s a realistic possibility. If you’re selling to a big company or a private equity firm, they probably will 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.

In my experience, 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. It can happen very quickly if there is a gap in cultural fit, management style, views on customer service, growth strategies or views on the communities where they want to operate. Two years is a long time, and picking buyers who are simpatico with you—even if they made a lower bid—may be smarter.

Will I be disappointed if the new buyer stamps out my brand? Some corporate buyers’ modus operand 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 national brand name.

You may understand how they feel from a strategic perspective, but it still can be agonizing to watch Monolith Inc. paint its name on your trucks if you have spent 10, 20 or 30 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.  

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Why You Shouldn't Sell Your Business To The Highest Bidder:

For additional information regarding Florida business sales, acquisitions and valuations, please contact Eric J. Gall at info@buysellflbiz.com or 239.738.6227. Also, visit our Florida Business Exchange website at www.fbxbrokers.com and my personal website at www.buysellflbiz.com.