You can count on it: when the bids are on the table, the race seems to be on. At first, the highest bidder threatens to walk away with the loot. Until it turns out that the highest bid is often not the best.
I recently assisted an entrepreneur in selling his business. In the end, two parties made takeover offers. One was a strategic buyer who wanted to integrate the business into his existing organization. The other was an investor who offered higher and strongly believed in the growth potential.
Good deal
The entrepreneur had put his heart and soul into the business for over thirty years. The higher offer felt like recognition for all he had built. There was a strong preference for the highest bidder. I see this reflex more often. The highest bid sets the tone for the rest of the process.
This is understandable, but also risky. Because the real consideration thus moves into the background. Indeed, it is not so relevant who offers the most. The real question is what is ultimately being settled. And under what conditions, with what certainty and at what time. This is exactly where the difference lies between an attractive bid and a good deal.
Components
In this particular situation, the investor's offer was made up of several components. A significant part depended on future performance and on external financing yet to be finalized. The strategic party offered less, but was able to pay for the acquisition almost entirely from its own resources and had a clear integration strategy within the existing organization.
On paper, the difference seemed clear. In practice, it only began there. Because once the process deepens, assumptions become concrete. The more parts still to be filled in, the greater the scope for changes in the initial offer and conditions.
This concerns, for example, working capital, the question of whether profit corrections will hold up in the future, and costs or investments that turn out to be more structural than expected. That concretization determines the extent to which the price and conditions are again up for discussion.
Deal certainty
In the due diligence process with the strategic buyer, the line of the original acquisition proposal remained recognizable. Specific substantive questions were asked and the decision-making process took place via short lines. The investor, on the other hand, asked broader, more exploratory questions and was noticeably dependent on financing partners for decision-making.
For us, these are important signals about the likelihood that a transaction will actually be completed. To assess this, we use a simple but effective consideration framework: the extent to which the buyer understands the business in substance, the certainty of financing and decision-making, the complexity of the transaction structure, and the consistency in the buyer's process and behavior.
Clear structure
Based in part on these considerations, the entrepreneur ultimately chose the strategic buyer. That one may have had a lower offer, but the structure of deal was clear and largely immediately affordable.
The transaction was completed within a few months, with no renegotiation and no surprises at the final stage. What initially appeared to be a difference in price turned out to be a difference in security in practice.
