Reconciling Value with “Offer for Purchase”

An offer for purchase says almost nothing about the value of a business. Why? Because "value" (as in market value) is the price a buyer is willing AND ABLE to pay. An offer, by its very nature, does not say much about ABILITY to pay. Heck, it may not even say much about actual willingness! You know, it's easy and ego-stroking to throw around big money and big plans, for investors or company managers to talk about buying another business.

There is also a rather unscrupulous business-buying strategy used in the marketplace whereby the buyer offers a high price (i.e., one the buyer would never actually pay) to get the seller prospect to the table and to begin working long and hard on the deal. Key to the strategy is to get the seller to feel so close to retirement - to the good life - that he/she can taste it! Even better is if the seller tells his/her friends and family (and those who are prone to fall prey to scams like these often will!) or makes a big asset purchase (vacation home, boat, etc.). Then, late in the game, the price gets reduced. Some sellers will be unable to swallow their pride and "go all the way back to their former life." So, after a big fight, they just accept the lower price.

I see MANY business owners get confused about this issue of value as it relates to "offers." They get a big offer - often just a verbal - from someone, and they accept it as "what the business is worth." Then, when they want to sell, they waste countless amounts of time, money and credibility trying to get this number. Or they place this value in their estate plan and - garbage in, garbage out. The day of reckoning will come.

This issue also comes into play when a business owner who is selling out receives multiple offers. What should he/she do, just accept the highest-priced offer? Well, if your time has little value to you, you'd feel just fine about simply taking the highest offer. But if you DO value your time or have a date certain by which you may want to close a transaction, "ability to pay" becomes an all-important consideration.

More food for thought? Consider the business seller who was offered $4 million all cash for his business and, in the end, the buyer was unable to get the deal done. What is the business worth? Is it worth $4 million?