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Case Study: When the best buyer offers a low valuation

|Case Studies

When we bring our sell-side clients to market, we run a tight process which means we bring in multiple buyers all vying for the same company.  By running a process, the seller gets to meet multiple buyers, each offering their own approach to a potential acquisition (financial buyer, strategic buyer, capital partner).  

When reviewing offers, it's important for a seller to factor in cultural fit along with valuation terms.  In our business, we often ask our clients to rate the prospective buyers based on fit before sharing the terms of their offers.  We want to get an unbiased view of how they perceive each group, without allowing money to be a factor.

What happens when a seller's top pick is also the lowest offer?

We had a manufacturing client who received 7 offers for their business.  Before presenting the offers, we asked the seller to rate the 7 groups based on cultural fit.  One of the groups stood out as the clear frontrunner.  However, when it came time to review the offers, this top-choice was the lowest by a significant amount.  Many of the other offers were in a close range, but Choice #1 was a low outlier.   

We went to Choice #1 and worked to bridge the gap, given the level of fit, but even with an increase in purchase price, the offer remained significantly lower than the others.  

In discussing this with the seller, they also felt that two of the other groups (the 2nd and 3rd best offers) would be a really good successor of their business and would care for their employees and customers.  Because Choice #1 couldn't get there on valuation and highest offer didn't have the right cultural fit (in fact, the seller ranked it their 6th choice), we went to Offer #2 and negotiated a great transaction for both buyer and seller.

In the end, the transaction closed on time and years later has proven to be a win-win for both buyer and seller.  

It's a reminder that money is a big influencer when selling your business, but it shouldn't be the only factor.  We've seen transactions go bust after closing because the seller only cared about top dollar, but the cultural conflict reared its head, making the transition nearly unbareable for the retiring seller and key employees.  Consider the traits that are most important to you in a buyer when it's time to sell and stick to your guns, even when money starts talking.