Anyone have experience beating out a better (higher) offer?
June 28, 2022
by a searcher from Brigham Young University in Mesa, AZ, USA
Got word that there is a higher offer LOI. Anyone have experience convincing a seller that you're still a better option even though the other offer is higher? Or best ways to sweeten my offer without overpaying? Earnouts...what else?
from University of Wisconsin in Los Angeles, CA, USA
Is there a broker involved? Try to develop a good relationship with the broker for intel. If possible, try to meet the seller for dinner to develop a stronger relationship, make them like/trust you, and learn more.
Try to find out the sellers goals and what they are looking for in the ideal transaction, their views on the future of the business, what the other offer looks like, and learn more about the other buyers.
Some important things to find out during this conversation: i) Why is the owner selling and what are the most important considerations for them?; ii) Are they looking to exit completely or do they want to stay involved and roll equity?; iii) How much do they care about what happens to the company legacy, culture and existing employees?
For some sellers looking to exit 100%, the most important factors are purchase price and speed/certainty to close. I think you will struggle in those situations because purchase price is important and I am guessing as a searcher you provide less speed/certainty to close compared to a PE or strategic acquirer.
However, for many sellers, the business is their baby, and they want to do what feels right for their business and employees. This is especially true if they want to stay involved and roll equity. After building a relationship with the seller, sell them on your business plan and why you will be a better steward for the business, employees and culture. Tell them how they will earn more value over time through rolled equity (although most PE Firms also allow rollover and will have a positive track record to point to). Also let them know strategic and PE buyers will likely lay off employees and change the culture. I have seen deals where the seller will go with a lower offer if they think the other buyer will be a better partner and steward for the business..
from Harvard University in Boston, MA, USA
Digging deep on the structure you're offering vs. the higher overall number may help (e.g., you're at $10M with a 10% seller note; other offer is at $15M with only $5M guaranteed and the remaining $10M on an earnout - whose is better? That's up to seller psychology). What's the seller's day 1 payout? How much if any of the sale price is deferred or at-risk?
Some potential deal-killer points are unlikely to surface at the LOI stages, but could give you a second bite at the apple (e.g., specific structure of non-compete, R&W, indemnity basket and cap, retention plan for key employees, etc.) - generally I think searchers may be more accommodating on these points than a PE firm or strategic buyer.
And especially in "smaller" small businesses, fit / legacy / cultural integration can't be ignored. It probably won't get you a multimillion-dollar discount, but it's one of the factors that's typically most strongly in your favor.