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Don’t take low acquisition offers personally

John Wagner - Acquisition offers

A neighborhood friend stormed into my house recently, fuming. He’d just put his house on the market and gotten a bid the very first day. The real estate agent told him the bidder was his next-door neighbor.

That’s not what upset him. It was the bid. It was really low. Below the house’s listing price.

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He ranted: “I can’t believe that anyone, to say nothing of my next-door neighbor, would try to low-ball me!”

I stared at this friend in quiet amazement. I said: “Sit down. Let me tell you how the world actually works. First, don’t take a low bid personally. Even though the bidder knows you, that doesn’t mean he’s going to give you free money just because you’re a nice guy. He’s just trying to find the bottom of the price range.”

“Secondly, the bidder is working on asymmetrical knowledge. His bid is the first step in ‘gaming’ the house price, so he doesn’t pay a penny more than what you’d accept.”

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I explained that my friend’s listing price may have been perceived as a “reach price,” searching for a “stupid money” buyer. The bidder may be gaming out the agent, who often advise sellers to list high, and take something just below the “ask.”

“Why not counter?” I asked my friend, “but offer price guidance.” Here’s how: Without naming an acceptable price, have the agent— whose job it is to buffer the emotions of buyers and sellers—show some square foot comps, citing prices recently paid for similar houses. With  this  guidance,  the  bidder’s  information is better harmonized with the seller, and they may come back with a higher offer.

If my friend had said, “I won’t sell to that guy at any price!” he would have lost the advantage of a bid-in-hand.

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That bid-in-hand, albeit too low, has some real utility. For instance, if another bid comes in, the real estate agent can say, all casual-like, “Wow, lots of activity on this listing! Second bid this weekend.”

The same thing happens when selling LBM businesses, even though we, as the seller’s rep will never, ever say a price.

A bidder may offer a low-ball bid, trying to find the bottom. That’s quite common. But the seller shouldn’t take it personally. Instead, the seller, through their rep, the Investment Banker (IB), should use the bid as leverage with other bidders, just as the agent did. With a bid-in-hand, the IB will call interested parties, saying: “This deal is heating up. In fact, I’m looking at an LOI right now. Want to get in the game? I’d suggest drafting an offer within 36 hours. Take your best shot early on this one.”

Next, the investment banker should offer guidance to the low bidder. Show the multiples of EBITDA being paid for other similar businesses. Your IB should have access to databases that show these for recent deals.

Next, use the bidder’s pricing logic as a leveraging device. Show that the bidder has the right multiple, it’s just been applied to  the  wrong time period, e.g., last fiscal year as opposed to trailing-12-months.

Next, calculate the effective buying multiple of EBITDA after the first year of new ownership. If a company is bought at 5X EBITDA but is growing (typical of companies up for sale), the new owner should be aware that a year after closing, with the EBITDA climbing up, they may have purchased it at 4X or 3.5X in a 12-month retrospective. This is very persuasive.

Finally, offer a bridging mechanism to get the buyer to agree to a higher price, without needing to come up with the cash at closing. An earn-out is the most common tool for this, where an additional sum is paid for the business, often 12 months after closing. A seller’s note is common too, where the seller essentially loans the buyer money for the purchase. Earnouts and seller’s notes both reduce the cash-at-close requirements, both attractive and very common deal elements today.

Bottom line: Don’t take low offers personally. It’s just the buyer doing what buyers do: finding the bottom. Instead, use the low offer as a leverage tool to get the price up, or to signal to other interested buyers that—Whoa, hot property here, getting lots of attention!—it’s time to get in the game if they are seriously interested.

John Wagner is a managing director at 1stWest Mergers & Acquisitions, which offers a specialty practice in the LBM sector. Reach John at j.wagner@1stwestma.com

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