You have an offer for your business: how to tell if it is good
A letter arrived before you went looking. Six questions, taken in order, tell you what the number is worth and what to do before you reply.
An unsolicited offer is an opening position from a buyer who expects theirs to be the only number you have seen. Work out what the price buys and how much arrives as cash at closing, then place it in your industry’s range. Before replying, test it quietly against two more buyers while exclusivity is still unsigned.
Why an unsolicited offer arrives
A buyer who writes to you before you have gone to market has usually done the arithmetic already. They know the business or the industry. They also know that an owner who has kept the idea private holds one number, and it is theirs.
The offer may still be a good one, and some of the best prices paid for Canadian businesses started as a letter from a competitor. Treat it as an opening position from someone who expects to set the terms of the conversation.
First: what is the number a number for
Before comparing the price to anything, work out what it buys. The letter should say whether the buyer is taking the shares or the assets, and whether the cash in the business goes with them. Check what happens to the building and the vehicles too, down to the truck you drive home.
Take an offer of $2 million for the shares, cash free and debt free, meaning you keep the cash and repay the debt at closing, including any CEBA loan. Set it beside an offer of $2 million for the assets with you keeping the receivables, and the two differ by several hundred thousand dollars after tax. Share sale or asset sale sets out why.
Second: how much of it is money
Read the payment terms before the price. Cash at closing is the only certain part. A vendor note is a loan you make to the buyer, and an earnout depends on the buyer running your business well. Both are worth less than their face value, by a discount that depends on who the buyer is.
- A price that is 60 percent cash and 40 percent earnout over three years is, in practice, a 60 percent offer with an option on the rest.
- An unsecured vendor note from a buyer whose only asset is your business is a note you should price as a risk.
- A rollover, where you keep a minority stake, is worth what the buyer says it is until you can sell it, and the letter should say when that is.
Take, as an illustration, a letter offering $3 million for the shares. Split by payment terms, it reads as follows.
| Part of the price | Amount | What it depends on |
|---|---|---|
| Cash at closing | $1,800,000 | Paid on the closing date |
| Vendor note | $600,000 | The buyer repaying you over three years |
| Earnout | $600,000 | Revenue holding at its current level for two years |
| Headline price | $3,000,000 | The figure at the top of the letter |
The certain part of that offer is $1.8 million. The note adds $600,000 that rests on the buyer’s ability to pay, and the earnout adds up to $600,000 that rests on results. The AI Offer reader in the workspace reads a letter and sets the guaranteed money apart from the conditional money in the same way.
Third: where it sits in the range
Now compare. Your adjusted earnings are the profit a buyer would inherit once your own pay and personal costs are added back. Apply your industry’s range to them, then move it for size and for the four factors buyers price, which preparing a business for sale sets out.
A buyer who is alone will usually offer near the bottom of the range. An offer near the top comes from a buyer who wants something specific.
If your adjusted earnings are still to be worked out, get them first. The free Quick AI valuation gives an early range from your website and revenue band, and the Full AI valuation reads your statements once you register. The piece on online valuation accuracy explains why that early range is wide.
Fourth: who is asking
A strategic buyer, meaning a competitor or a firm next to you in the market, can usually pay more than any other buyer, because your customers are worth more on their cost base than on yours. If a strategic buyer has opened low, there is room.
A private equity firm, or a search fund backed by investors to buy one business, prices from a model and will move up to the limit that model sets. An individual can pay what a bank will lend them on top of their own savings. Who buys Canadian businesses describes each.
Fifth: what it will cost you to say yes
Accepting an offer means signing an exclusivity clause. From that moment you are bound to this one buyer for 45 to 90 days, and the buyer can spend the period finding reasons to lower the price. Your leverage in this sale peaks in the moment before you sign.
That is the argument for a quiet process of a few weeks, even when the first offer is good. Two other buyers approached under non-disclosure agreements will, within a month, confirm the offer or improve it. Taking the only offer on the table is a common seller’s mistake.Reading a letter of intent covers what to settle before signing.
Sixth: what you would do with the money
This question is partly about money and partly about the people you leave behind. An owner who sells at a fair price to a buyer who then lays off the staff and loses the customers is often unhappier a year later than one who took less from a buyer who kept the business whole. Whether this is the moment to sell at all is the question in when to sell a business.
Meeting the buyer tells you which kind this is, and the letter alone leaves it open. What happens to your employees covers the questions worth asking about the staff.
What to do with the letter this week
- 01Reply that you are considering the offer and will respond within a set period, and hold any counter price for later.
- 02Work out your adjusted earnings and your range while the sale is still a private matter.
- 03Read the payment terms and structure as carefully as the price.
- 04Decide whether to test the offer against two more buyers, quietly, before exclusivity.
- 05Then send your reply, with a number in it if you have decided to make one.
Questions owners ask
- Should I accept the first offer for my business?
- Compare it first. One offer is a number and two are a market. Approaching two more buyers under non-disclosure agreements takes about a month and either confirms a good first offer or improves it, and your leverage holds until you sign exclusivity.
- How do I know if an offer for my business is fair?
- Compare it to the range buyers pay in your industry for a business your size, applied to your adjusted earnings. Then read the terms: cash at closing is worth more than an earnout or a vendor note, and a share sale is worth more to you after tax than an asset sale at the same price.
- How should I reply to an unsolicited offer?
- Thank the buyer and say you are considering the offer and will respond by a set date, keeping any counter price for later. Use that time to get your adjusted earnings and your range, and to decide whether to test the offer against other buyers before you enter exclusivity.