Are you contemplating selling your business or creating an exit strategy ? It could be tempting to jump into the process of selling your business without...
Should I Take My Business off the Market When I Receive an Offer?
As a Certified Business Broker, and the president and founder of Morgan & Westfield, the question I get asked repeatedly is this: “when should I take my business off the market”? The most common scenario is when one of our clients has just received an offer for a business they have for sale. I often receive a call from a very excited seller informing me that there is an offer on the table and asking whether now is the time to take the business off the market. I am going to tell you the same thing I tell my clients – do not take your business of the market yet!
I often hear the excitement in my client’s voices when they make that call to let me know there is an offer. This is especially true when a business has been on the market for an extended period of time and finally a buyer has come along. Unfortunately, and I have seen this time and time again, many deals fall through and never make it to closing . By taking your business of the market just because a buyer has come forward with an offer, you are placing yourself in a position where you will be left with no buyers and no chance to sell the business if the current offer falls through. As the old saying goes “plan for the best but prepare for the worst.” This is exactly on point here. You can continue forward with the buyer who has made you an offer but you still need to plan for the worst case scenario – the deal falling through.
First, it is good practice to keep your business on the market until it is actually sold. By keeping your business on the market, you are keeping the buyer on his or her toes! Remember, just because you receive an offer does not mean the deal is done. You can make a counter offer and try to negotiate a higher price or better terms; you do not have to take the buyer’s first offer. However, if you immediately take your business off the market, you are putting all your eggs in that buyer’s basket . You are sending the message “I have no one else, the business is yours,” and you have lost your leverage. That is just bad strategy! Keep your business on the market while you go through negotiations and make sure the buyer knows you have options.
Second, while you are in the negotiation process with one buyer, you have the opportunity to receive backup offers. If the deal with the original buyer goes through without a hitch, then you have lost nothing. However, if your sale falls through, you have gained additional potential buyers. If the original offeror backs out of the sale, you can quickly push another buyer into that position and proceed with the sale.
The next question that ultimately follows is: “then when can I take my business off the market”? Ideally, you will want to keep your business on the market until you have a definitive purchase agreement signed and have all the contingencies removed or until you receive a non-refundable earnest money deposit . This will allow you to protect yourself in the event the sale falls through. There are times when the parties will agree to a “breakup fee,” which requires the party who decides not to pursue the deal to pay a fee to the party still willing to go through with the sale, if the deal does not follow through to fruition. However, in smaller deals, where the buyer is often an individual, these fees are a rarity and I always tell my clients to keep the business on the market until they have that definitive purchase agreement or a non-refundable earnest money deposit.
For larger businesses, which are considered middle market deals, it is most likely that the buyer will be a company or a private equity group. These buyers are not your average individual looking for a small business to acquire. Rather, these companies and private equity groups will invest extensive amounts of time to complete due diligence and, therefore, will want some assurance that they will actually be the one to purchase the business if they choose to do so. For that reason, buyers of businesses in the middle market often request a “no-shop clause,” which will require you to take your business off the market once they have provided an offer. Typically, they will request the business stay off the market for one to three months while their team works on the transaction and prepares to purchase your business. This makes sense; before they invest time and money determining whether to purchase your business, they want to make sure another buyer does not swoop in and take the business out from under them.
Knowing when to take your business off the market is determined by the size of your business and the parties involved. You may be asked to sign a no-shop clause or a breakup fee agreement. However, it is in your best interest to keep your business on the market until you have assurance that it is sold. By keeping your options open you maintain leverage and allow yourself to have backup offers in case a potential buyer decides to refuse to go through with the sale.