In this article we’ll discuss multiple offers when selling a business. As a point of reference, we’ll discuss multiple offers in residential real estate which occur at a much higher rate.
How Common Are Multiple Offers in the Sale of a Business?
In general, multiple offers are not common in the sale of businesses. Selling a business can be challenging and the success rate is low. The percentage of businesses listed for sale that actually sell is 10-30% depending on the market. Of these successful sales, I estimate the number of listings that received multiple offers at the same time to be well under 10%.
The vast majority of businesses sell below list price, very few businesses sell for all cash at closing, and many businesses require the seller to finance a portion of the sale or have part of the proceeds contingent on future triggers called earnouts. Knowing these statistics, the question shifts from multiple offers to “How can sellers and buyers of businesses increase their chances of closing a sale at all?”
Also read What are the Inescapable truths of Buying or Selling a Business?
How Common Are Multiple Offers On a Home Sale?
In hot markets, even average or sub-par homes can attract multiple offers. In a balanced market, the better homes attract multiple offers. In a slow market, only the best homes, if any, will attract multiple offers. Many factors can contribute to multiple offers. These factors can be home characteristics such as upkeep, upgrades, amenities, views, and lot characteristics or external factors such as interest rates, housing supply, property taxes, schools and neighborhoods.
Why Are Multiple Offers More Common in Residential Real Estate Than In The Sale of Businesses?
People need shelter and most U.S. adults choose home ownership. People also need income, but business ownership is only one of many options for achieving income. Necessity drives transaction volume. Each year, millions of homes change hands in the U.S. compared to about 10,000 businesses.
Transaction volume in turn drives familiarity. People are much more experienced and skilled at buying and selling homes than they are at buying businesses. Homes are simpler than businesses. Home inspections are more straightforward than business due diligence. Homes are easier to compare and evaluate than businesses. And quite frankly, real estate is generally safer than business ownership.
How Can I Get Multiple Offers for a Home Sale?
As previously mentioned, a lot depends on how hot the market is. However, you can increase your chances of obtaining multiple offers by paying for inspections in advance, fixing and documenting major repair items as well as some minor repairs, vacating the home and staging it, finding a way to offer the staged furniture included in the sale, listing your home below market value, making the home widely accessible during the listing and ideally generating traffic jams at open houses.
Can I Get Multiple Offers for a Business Sale?
Because transaction volume is low in the business for sale marketplace, multiple offers are not common. Open houses are not possible for confidentiality reasons. Vacating and staging are not possible – the business must go on. Repairs to equipment and facilities is one thing, but repairs to business models or financial performance take years. Sellers can only do so much to increase the chances of multiple offers. Their focus should simply be on increasing the attractiveness of their business. And then if other things line up, they may have the good fortune of multiple offers. A seller should realize this is rare and proceed sensibly if they are lucky enough to be in this position.
Case Study: Seller Fumbled a Multiple Offer Opportunity
I had a seller who received two verbal offers at the same time despite issues with the business. Both buyers were larger business owners who viewed this metal processing business as small, simple and easy to integrate. The Seller was so emboldened by two verbal offers, plus a third request for a plant tour, that he alienated both buyers. He alienated the second buyer by demanding he be allowed to finish existing orders after closing. That buyer had little tolerance for the seller’s unusual request, seeing it as a change to the seller’s advertised offer. The first Buyer, who I felt was the best buyer for the business, tried patiently to offer something workable for both parties. After months of dealing with a stubborn seller, the buyer concluded the opportunity was not worth the aggravation of working with the Seller on a business transition.
Can a Business Broker Help a Seller Get Multiple Offers?
A business broker can help increase the chances of multiple offers. A business broker can use their finesse to speed up or slow down the courting process with different prospects to line up multiple offers at the same time. While this is possible, it is not probable. The best thing a business broker can do is to help the seller present a more marketable business.
Another option is an auction style sale with defined timelines for buyers to submit offers. In residential real estate, this process is very effective in hot markets. In business sales, this requires a large buyer database. This approach is sometimes used by M&A advisors, not business brokers. The M&A buyer database must be large and relevant. It includes financial and strategic buyers, not wealthy individual investors. The risk in this approach is a lack of interest, forcing the M&A advisor to put the business back on the market after an unsuccessful auction.
Tips for Selling a Business and Possibly Getting Multiple Offers
- Sell on an economic uptrend
- Sell on a 3-year+ company uptrend in profits
- Sell when financing is easy and rates are low
- Create an absentee-owner business
- Develop a stable and reliable employee base
- Document key processes
- Develop a diverse set of customers
- Create recurring revenue
- Secure long-term customer contracts
- Build consistency
- Anticipate buyer due diligence requests
- Price the business aggressively
- Be open to seller financing or earnouts
- Own the real estate and sell it as a package
- Collect great reviews and testimonials from happy customers
- Develop key differentiators and barriers to entry
- Strengthen supply chain
- Include inventory and working capital in the sale
- Do not claim any carve outs (significant aspects of the business not included in the sale)
- Provide a comfortable transition for the buyer
- Empathize with the buyer
- Backup claims of “growth potential” with data or steps already taken
What Are the Key Differences in Attracting Offers for a Home vs. a Business?
In both cases, preparation is important. However, there is a significant difference in the preparation of a home for sale versus a business for sale. Here are some major differences.
- Confidentiality: A home for sale is typically broadcast openly while a business for sale usually requires confidentiality due to concerns about affecting employees, customers and suppliers. Confidentiality is less critical to certain business sellers than others, so a business seller should evaluate the importance of confidentiality. Here is an example of one owner who changed his requirement for confidentiality.
Case Study: Owner Changes Confidentiality Requirement
The owner of a dry cleaner wanted confidentiality when he listed his business. As the listing went on, he felt more comfortable confiding in his employees. His interest in retiring would not have surprised anyone and they were all local, part-time employees who would be happy to stay with their jobs as long as they got along with a new owner. There was little risk of any employee or customer leaving on the news that the business was for sale. The broker was allowed to change the listing to non-confidential and this eliminated many inquiries purely on the business location. It also allowed showings during business hours which enabled buyers to feel the energy at the store during the day. In general, it reduced friction in the selling process. This is an exception to the rule as most business owners need confidentiality throughout the process.
- Maintenance: Prior to listing a home, a homeowner could hire professional cleaners, gardeners, pool care, and pest services to elevate the maintenance of the home. They could even purchase an annual air conditioning and duct cleaning service and home warranty for the buyer. This could all be initiated just weeks before listing the home. When listing a business, housekeeping activities might need to be initiated a year in advance or more if 1) there has been considerable deferred cleaning and maintenance, 2) the business has a significant number of assets like vehicles or machinery, 3) the business has industrial chemicals or oils, or dust and shavings from production. Furthermore, housekeeping for a business extends to financial statements, records, processes, people policies, culture and more.
- Financing: Both a home and a business can be pre-approved for financing, but the advanced planning will typically be longer for a business to optimize its assets and financials for pre-approval. Additionally, seller financing is much more prevalent when selling a business than a home. In the sale of a business, sellers who are open to seller financing will attract more offers than sellers who are not.
- Reports: Some home sellers pay out of pocket for inspection reports and appraisals even though these items are typically ordered and paid for by buyers. Sellers do this in order to make decisions on repairs in advance of listing, to market a well-maintained home relative to others on the market, and to eliminate as much doubt as possible for buyers. Obtaining reports and appraisals are not commonly done by business owners, but should be considered, especially if the business is quite unique or if real estate is included.
At a minimum, business owners must assemble financial statements and asset lists in preparation for listing. A business owner’s ability to assemble a complete and organized set of financials and reports can make or break a sale. Furthermore, if the picture painted by these reports is not compelling, the owner may have to work on parts of the business in advance of a sale.
Exit planners work with business owners to continuously optimize their businesses to prepare for an eventual exit. Exit planners encourage sellers to start planning at least three years in advance of a desired exit date.
- Transition: There is very little transition involved in the sale of a home. The seller might buy a 1 year home warranty for the buyer and call it a day. Most home buyers don’t expect much more than that. Business buyers on the other hand, must deal with considerably greater risks when buying a business. If the business seller offers comprehensive training and a transition plan, either included, for a fee, or a combination of the two, the seller can help bridge the gap for an undecided buyer and save the sale.
As a Buyer, How Can I Win Against Competing Offers For a Home?
Typically the most impactful thing a buyer can do to win is offer the highest price, but sometimes other things will trump price as long as the offer price is not too far behind the highest offer. Buyers can increase their chances in multiple offer situations by getting pre-qualified versus just pre-approved, providing proof of significant funds, offer a large down payment or all cash, waiving the appraisal and/or inspection contingencies, offering a fast closing, or cooperating with any Seller needs such as a rent-back or 1031 exchange.
If you’ve lost out one or more times already, think about what you are willing to offer and the risks you are willing to take to win the next property. However, waiving inspection and appraisal contingencies are not to be taken lightly.
As a Buyer, Am I going to Compete Against Other Offers For a Business?
Buyers rarely have to compete when making an offer on a business. That said, buyers should know that 1) a seller may refuse to sell if there is no adequate offer, 2) most sellers do not want to finance the buyer or accept future payments as earnouts, 3) the best businesses will command the highest prices and 4) while competition from other buyers is not probable, it is possible, so heed any guidance from the seller or broker.
Case Study: Buyer Fumbled a Multiple Offer Situation
Jack was a very qualified and motivated buyer for a small machining company who told me he wanted to put in an offer. In an effort to be transparent, I let him know there was another interested party and encouraged him to move forward. I let him know that while interested parties often disappear, I always tell buyers about potential competition so nobody gets blindsided. Jack then disappeared for three weeks and did not respond to three follow up calls from me. The sellers favored him and were disappointed.
The other party that I told Jack about never moved forward, but during Jack’s absence, two other interested parties surfaced and one of them put in an offer. When Jack called me a month later to “pick up where we left off,” I told him the Sellers had accepted an offer. Not only was Jack surprised, he had the nerve to question why I didn’t make the sales process clear to him. Jack followed up with me three times during escrow, but unfortunately for Jack, the transaction closed without him.
How Can I Get My Offer to Buy A Business Accepted?
Buyers can do the following to improve their chances of getting their offer accepted, especially in a multiple offer situation.
- Have proof of funds in the form of account statements or bank letters
- Limit or eliminate seller financing or earnouts and even third-party loans
- If a loan is required, ask for financials required by the lender up front so the seller can see a pre-approval with your offer
- Have a buyer profile (like a buyer resume demonstrating qualifications to run the business)
- Ask the broker or seller what is most important to them in the sale and how you can honor what they have built
- Step into the seller’s shoes and show empathy
- Communicate your due diligence requirements up front and if possible, organize due diligence compared to “most buyers”
- Offer a reasonable, defendable price
- Demonstrate your ability to learn, thus easing the seller about his training obligation
- Look for openings to establish rapport or a connection with the seller
- Bring any team members skilled at establishing rapport (this could be a spouse, mentor, or manager with a winning personality)
- Minimize purchase agreement conditions and contingencies to the extent that you are comfortable
- Accommodate the Seller in a 1031 exchange if you are buying real estate along with the business
- Show the seller the patience that other buyers may not
More Tips for Winning Offers: Buying a Business Versus a Home
- Loan pre-approval
- Home Buyer: Present strong credit, have a high down payment and good earning potential
- Business Buyer: Provide the lender with a resume, back up your skills and qualifications to succeed in the business
- Transition
- Home Buyer: Work with the seller’s needs regarding possession, rent back, storage, scheduling, 1031 exchange etc.
- Business Buyer: Demonstrate to the seller you can learn quickly during training or that you will be an enjoyable and competent “partner” working alongside the owner during a longer transition. This minimizes aggravation for the seller, and in the event they are financing part of the sale or waiting for earnouts, instills confidence in your ability to get them paid in the future.
- Due Diligence
- Home Buyer: Due diligence on a home is relatively easy and well-understood by home sellers. Nonetheless, a buyer can simplify the home inspection process and shorten the inspection timeline in the offer.
- Business Buyer: Due diligence on a business is relatively difficult and not well-understood by business sellers. If a buyer, with the help of a broker, can simplify the due diligence process and timeline in the offer and educate the seller that the process and timeline will be significantly better than what most other buyers require, you will have an advantage.
- Chemistry and Emotional Awareness
- Home Buyer: Let the sellers know the home is in good hands if this is an emotional sale. This is often a person’s most significant financial and emotional transaction.
- Business Buyer: Let the sellers know the business is in good hands and their legacy will be honored. This can be even more significant, financially and emotionally, than selling a home.