Why a Competitive Process Is Important When Selling Your Business

When it comes to selling your business, one of the biggest mistakes you can make is going with the first buyer who comes along. Running a competitive sales process is crucial to maximizing your financial outcome and reducing risk. Here’s how and why it works.

What Is a Competitive Sales Process?

Simply coordinating inbound interest from buyers isn’t enough. A true competitive process means actively engaging multiple qualified buyers, assessing their ability to close, and leveraging their bids to achieve the best deal possible.

A solid competitive process has several key elements:

1. Engage Many Buyers: Go beyond the few who contact you first. Conduct research, tap into your network, or work with a broker to identify strategic or financial buyers who could be interested.
2. Vet Buyers Carefully: Check their track record, financial capability, and strategic fit. This ensures you’re not wasting time on buyers who are unlikely to close.
3. Encourage Competition: Structure your process to generate multiple offers and use term sheets to negotiate better deals.
4. Assess Buyer Commitment: Evaluate how invested buyers are by how much time and money they’re willing to spend during diligence.

Why Competition Matters

1. Higher Valuation Through Demand Just like in any marketplace, more demand leads to higher prices. Consider this: We once worked with a software company that received initial offers ranging from 2x to 5x revenue. Only by creating competition did we get the best outcome.

Actionable Tip: Don’t settle. Always test the market, even if a buyer promises a “quick and easy” deal. A higher bid might be just around the corner.

2. Better Transaction Structure Buyers often propose deferred payments or earnouts, where a portion of the price is paid later if certain targets are met. This setup is risky for sellers. Imagine being unable to make key business decisions because a buyer now controls the company’s direction and you carrying the risk of those decisions.? Having multiple competitive bids gives you leverage to negotiate the terms you want.

Actionable Tip: Use competing bids to push for a clean cash deal or better terms. If one buyer insists on an earnout, another may offer a simpler structure.

3. Shorter Timelines You might think more buyers would slow the process, but it’s the opposite. Competition motivates buyers to act quickly. Without competition, a buyer may drag out diligence, waiting for you to feel pressured or tired of the process.? In a recent transaction, a strategic buyer tried to extend the diligence period, hoping to renegotiate terms later. Because we had a competitive process, we secured a faster deal with a more committed buyer.

Actionable Tip: Set a clear timeline and stick to it. Ensure buyers know there are other parties involved and that delaying the process could cost them the deal.

Avoiding Buyer Tactics That Reduce Your Leverage

Buyers often try to control the timeline and terms by pushing you to sign an exclusivity agreement. This means you can’t talk to other buyers for 60-120 days while they conduct diligence. A prospective buyer benefits from this in a couple of ways:

• Due Diligence Discoveries: If they find something they don’t like, they’ll use it to renegotiate or walk away.
• Monitoring Your Performance: They might delay the process to see if your financials weaken, giving them more leverage.

Actionable Tip: Make buyers earn exclusivity. Limit exclusivity periods to 15-30 days, or even better, negotiate terms upfront before granting it.

Minimizing Closing Risk

If a buyer backs out late in the process, you lose time and momentum. This risk is particularly high with financial buyers who have multiple opportunities at any given time.

Actionable Tip: Always have backup buyers. In one deal we managed, a financial buyer pulled out when their funding fell through. Because we had a second bidder lined up, we closed quickly with minimal disruption.

Next Steps: How to Run a Competitive Process

1. Assemble a Strong Team: Work with experienced advisors or brokers to reach a broad pool of buyers.
2. Create a Comprehensive Data Room: Be ready with financials, contracts, and other documents to streamline diligence.
3. Set Firm Deadlines: Establish clear milestones for offers and diligence, and communicate these upfront.
4. Be Prepared to Walk Away: Leverage only works if you’re willing to say no to a bad deal.

Running a competitive process can be a lot of work, but it’s worth it. Don’t leave money on the table—let the market show you what your business is truly worth.

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