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How to Know the Broker Really is on Your Side

Ricardo (not his real name) retained me to help him evaluate an unsolicited offer recently received from one of his top suppliers.

I wanted to help Ricardo make the right decision, and that might be to not sell, even after receiving an attractive offer.

Rushing to sell your business, just because you get a tempting offer, can be a short-sighted financial decision.

Every business owner should understand the concept of net present value. Simply said, it is the value today of a business’ projected future cash flows, discounted each year by a rate of interest reflecting the owner’s cost of capital and risk to be in that business.

On the other hand, if you get an offer greater than the net present value of your business, you should think long and hard about why you wouldn’t sell it.

The potential buyer responded with an offer about 10% higher than their original offer.

If/when that eye-popping offer comes in, you’ll have a much better sense of how to negotiate and when to say yes or, as importantly, when to say no.

How to Know the Broker Really is on Your Side

“I call you for help selling my business, but you tell me I shouldn’t sell it now. What kind of business broker does that?”

Ricardo (not his real name) retained me to help him evaluate an unsolicited offer recently received from one of his top suppliers. During our first call, he said, “I am not looking to sell the company, we’re growing, I love what we’re doing for our customers, and the team I have around me is first class. But I’ve always heard these strategic buyers pay crazy prices, so when they came knocking, I thought I should hear them out.”

I assured Ricardo he was doing the right thing to evaluate the idea of selling, but my process would not be to just bargain for the highest price. I wanted to help Ricardo make the right decision, and that might be to not sell, even after receiving an attractive offer.

I get about one call a month from a business owner like Ricardo who needs help sorting through how to handle an unsolicited but tempting offer. Most M&A consultants get a call like this and immediately send over an engagement agreement excited to land a new client. That’s not how I roll. I spend time with the business owner to understand his/her objectives and understand the full context of their decision-making process. Rushing to sell your business, just because you get a tempting offer, can be a short-sighted financial decision.

Every business owner should understand the concept of net present value. Simply said, it is the value today of a business’ projected future cash flows, discounted each year by a rate of interest reflecting the owner’s cost of capital and risk to be in that business. Here’s how I boiled it down for Ricardo. “We need to calculate which option makes you the most money: selling now and reinvesting the proceeds for that five-year period or continuing the run the company then selling in five years.”

Now understand this, the net present value of your company is NOT the same as the market value of your company. Net present value describes what the company is worth to you, the owner. Market value describes what the company is worth to somebody else. It goes without saying, even if you get an offer that represents the full market value of your business, that doesn’t mean you have to sell it. On the other hand, if you get an offer greater than the net present value of your business, you should think long and hard about why you wouldn’t sell it.

When Ricardo and I did the math on his options, we calculated the net present value of keeping the business to be about 20% more than the value of the attractive offer. I met with the potential buyer and explained our thinking. The potential buyer responded with an offer about 10% higher than their original offer. It was indeed a very tempting number, but since even that revision was still not as high as the five year net present value of keeping the company, Ricardo decided to not sell.

If you are the owner of a growing business, you should never think about selling your company without first running a net present value calculation of keeping the company and selling it in five years. You might be surprised at what you learn. If/when that eye-popping offer comes in, you’ll have a much better sense of how to negotiate and when to say yes or, as importantly, when to say no.

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Tennessee Valley Group

Jim is an attorney (non-resident status with the Missouri Bar) and though he no longer practices law, he has read and negotiated enough legal documents to fill a cargo tanker. He has an MBA from Harvard Business School and knows how Wall Street and private equity operates. Jim is a Tennessee Supreme Court Rule 31 listed general civil mediator with tons of experience helping business owners (large and small) work through sensitive problems to achieve winning results. He is the author of "Home Run, A Pro's Guide to Selling Your Business, Seven Principles to Make Your Company Irresistible."

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