Navigating a competitive business purchase process
We continue to see and hear that it is a “seller’s market” in the context of business sales. There is high demand for good strong businesses and insufficient supply to meet buyer demand. Within that context, it is no surprise that many people are finding themselves in competitive bid situations when seeking to buy a business.
It becomes very important to be able to move quickly to assess the business, its value and its key risks, and put your best offer forward. However, if you get caught up in a whirlwind process and do not take the time to assess matters properly, you may end up paying too much or missing other factors that can lead to buyer’s remorse. The key is to find the balance of speed and a thorough evaluation process.
Scope of Review
Buying a business is not like buying a house. The due diligence is generally more extensive, and the purchase price you are willing to offer relies not on a single, generally passive asset, but on your ability to continue to use the business assets to generate revenue. Matters you need to consider in your due diligence include:
- What assets do you need to run the business, and what state are they in?
- What is the financial history and current financial state of the business?
- What have sales been like, and how have they been affected by recent events? What are the key drivers of revenue and will they continue or enhance under your ownership?
- Are there key contracts, premises, intellectual property and/or employees that are critical to ongoing business? Can you secure their continuity following sale?
- What skills will the seller be removing from the business, and what can you bring to replace those skills?
- What opportunities are there to grow and develop the business?
- What warranty and indemnity protection is the seller willing to offer in the sale contract?
We recommend seeking expert assistance at any early stage, which can include both an accountant and a lawyer, who can assist with review of business documentation and identifying key risks.
In some cases, the business sale may be run as an orderly (but competitive) process. You may be one of many initial bidders given access to an information memorandum, upon which you make an initial indicative offer based on limited information. A small group of potential buyers will then be invited through to detailed due diligence and asked to submit a final offer. In this case you are advised of the process and the steps involved ahead of time, and can plan and budget accordingly. To be the successful buyer, you need to make a strong offer based on your detailed assessment of the business and its value, and seek to include as few conditions as possible.
Alternatively, the sale process may be run more informally, whereby you are in discussions with a broker or agent (or the seller themselves) and invited to submit an offer, only to find you are in a multi-bid situation. In this case you may be gazumped at any time, and may not even be aware of other potential buyers until quite late in the process. You may find yourself in a quasi-auction style process without the benefit of an open auction room.
In either situation, there are some key points to keep in mind:
- Do not be rushed into making an offer at a price or on terms you are not comfortable with. Many business sales have a financing condition and a due diligence condition. If you do not have your financing in place or your due diligence complete, and you do not insist upon these conditions, you may find yourself committed to purchase the business at a price you can no longer justify or without confirmed financing.
- It is important to understand that an offer conditional on due diligence is less enticing for the seller than one that is not. If you have the time, information and resources to complete due diligence prior to making your offer (and the process allows this), then you can be in a better position to have your offer accepted.
- There is often limited visibility as to what other buyers are doing, so you need to ensure your own numbers stack up. If you keep this in mind, then you should be able to put forward a compelling offer, whilst being careful to not offer more than you are willing to pay.
- We understand that in some cases, buyers wish to limit their external costs prior to knowing if the value of their offer is accepted. This is particularly the case for smaller business acquisitions. Obviously you will still need to do some basic due diligence to formulate your offer amount, but at a minimum you should ensure the contract has a “solicitor approval” clause which enables you to have the contract legally reviewed after it is signed. In these cases, we would also still recommend you engage expert assistance in the early stages to ensure you have the protections necessary to enable you to complete the more thorough due diligence after your offer is successful and seek contractual alterations if it becomes necessary.
Buying a business is a big deal. Don’t be rushed into making a decision you cannot reverse, but also work with your advisors to ensure you are well placed to have your offer accepted. If you need assistance with your sale or purchase then do not hesitate to get in touch.