How to Answer a Lowball Offer

Read the number before you react

A low offer tells you one of a few things, and the first job is working out which. The buyer may have looked at your numbers and valued the company the way buyers in your field do, and your own idea of its worth is the one that is off. The buyer may have valued it on a different figure than you did, for example by taking out the add-backs you counted. The buyer may be new to this and unsure how the market prices things. Or the buyer may be opening low on purpose, expecting to land in the middle.

The way to tell is to lay the offer next to your own valuation, line by line. If you have not had one done, you are negotiating without a map, and our post on how much your business is worth is a place to start. Look at the earnings figure the buyer used. Many low offers turn out to rest on a smaller earnings number than yours, with an ordinary multiple applied to it. If the buyer left out an add-back, such as the owner's car or a one-time legal cost, the gap may be one conversation about documentation, and our post on add-backs covers how those get supported.

Then look at how the price is paid. An offer with a modest price but all cash at closing can be better than a large price paid over many years. Hold the number against the whole structure before you decide it is low.

Find out who sent it

The most useful thing to know about a low offer is whether the buyer can close. A buyer with proof of funds, a lender who has looked at the deal, and a history of buying companies is making a considered statement. A buyer with a friendly email and no proof is telling you very little, and the number may be as casual as the rest of the package.

Ask for what a serious buyer has handy. A letter from the lender, bank statements or a statement of net worth, a description of the businesses they have run or bought, and a short explanation of how they arrived at the price. Buyers who mean it will answer, and buyers who are fishing tend to get vague. We screen for this before buyers see your name, which is why our process leans so hard on buyer qualification.

Pay attention to the person's tone in the first call. A buyer who has read your materials, asks about your customers and your people, and can explain the price probably has a plan. A buyer who asks only about the discount you might accept usually does not.

Reply without ending the conversation

You can say no to a number without saying no to the buyer. The most useful first reply is short, polite and specific, and it comes within a day or two so the buyer does not assume you are offended or desperate. Something like this works: "Thank you for the offer. The price is well below where we see the company, and I would like to understand how you got there. Can we talk through your assumptions this week?"

Then you listen. Ask what earnings figure they used and why. Ask what they would change about the business and what they are worried about. A good deal of the time, the objection behind a low offer is a specific fear, such as the loss of one big customer or the owner's role, and that fear can be answered with a document, a contract term or a transition period. Our post on owner dependency covers one of the common ones.

Keep your reply free of anger and free of explanation of what you need. The buyer does not care that your daughter is starting college or that the shop needs a new roof. Telling them only weakens your position. Talk about the company and the evidence.

When the structure matters more than the number

Sometimes the price is lower than you hoped and the terms around it are what make the offer worth considering. A buyer who pays most of the price at closing, has financing in place, and wants a short and clean diligence period may be worth more than a buyer offering a higher price on loose terms. The reverse also happens: a headline price that looks generous can hide a large portion paid later, a contingency tied to future profit, or a holdback that may never be released.

Our posts on seller financing and earnouts and holdbacks explain how those pieces work and what each one costs you if the business has a bad year under new ownership. When a buyer proposes them, ask for the price with all of that taken out, because that is the cash you can count on.

An owner who has focused on the top-line price sometimes overlooks things like who pays the transaction costs, how inventory and working capital are handled, and how long the buyer needs to review the company. These are reasonable places to trade. A buyer who will not move on price may move on the date, the transition or the security for a note, and each one has value to you.

Counter, hold, or decline

You have three honest options and the right one depends on the buyer and on your other choices. A counteroffer makes sense when the gap is moderate and the buyer has shown they can close. Say the number you want, and give the reason in a sentence or two tied to the company's earnings and its history. Do not split the difference in your head before the buyer has made a second move. If you counter with the midpoint, the next stop is the midpoint of that, and you finish well below where you began.

Holding means answering politely and leaving the number where it was. It works when you have other interest or when the buyer has not yet seen the business closely. Some buyers open low to learn how firm you are and come up quickly when you do not move. Others stay low and then leave. You will usually know by the second round.

Declining is right when the buyer cannot show funds, when the gap is too wide to cross with any structure, or when the way the buyer has behaved suggests they will try to lower the price again later. A "no" costs you one buyer. Taking a bad deal because you could not stand another quiet week costs you much more. Our post on how long it takes to sell a business helps you set expectations about time, which is often what pushes owners into poor offers.

The low offer after the offer

The worse version of this happens after you have signed a letter of intent and the buyer starts reviewing the books. The price comes down, with a reason: a problem with the numbers, a lease issue, a customer who left, a piece of equipment that needs replacing. Sometimes the reason is fair, and you should expect to credit the buyer for a genuine error in what you reported. Sometimes it is a pattern, with a new reduction every week and a new justification each time.

The best protection happens earlier. Do not enter exclusive talks with a buyer until you have asked the hard questions and reviewed their funding. Make sure your own numbers are clean before they look, so the findings are small. Our post on getting your financials ready for a buyer describes how to do that. When a reduction does arrive, ask the buyer to put the cause in writing, check it against your records, and decide whether the issue is a one-time correction or a sign of a buyer who wants a discount for its own sake.

The final defense is a second interested party. An owner who has only one buyer has no answer to a reduction, because there is no alternative. An owner who still has a second serious buyer, even a quiet one, can say no and mean it.

Keep other buyers close

This is where marketing matters. If you went to market with an advisor, several buyers probably looked at the company, and some of them may still be interested at a price you can accept. When a low offer arrives, tell your advisor to go back to those buyers and see who is ready to move. Leave names out when you talk to the low bidder. If there is other interest, you can say so.

At Business Advisors of America we handle this part for owners, because the outcome of a low offer depends so much on whether another buyer is waiting. The number on the first email is rarely the number you close at in either direction. What decides it is what you can show, who else is looking, and how calmly you reply.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.