The Art of the Lowball — How Strategic Underbidding Can Lead to a Win-Win in Business Acquisitions Use these four strategies to employ a strategic underbid without jeopardizing the deal.
By Roy Dekel Edited by Chelsea Brown
Key Takeaways
- Understand that sellers often overvalue their businesses due to emotional attachment and optimism. This gives you leverage to introduce a lower offer that's grounded in actual numbers and achievable outcomes.
- Uncover hidden data during the due diligence process, and request financial breakdowns to assess the business's real cash-generating ability.
- Highlight risks such as client retention and churn rates to negotiate a lower price.
- It's also important to have a clear understanding of both the short-term and long-term risks in the industry you're entering. These insights can give you additional leverage to reduce the price.
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Negotiating the price point when buying a business requires finesse, especially when employing a strategy like underbidding. The key is to balance an offer that works for you while maintaining a relationship that leaves both parties satisfied.
Use the following four strategies to master the art of strategic underbidding in business acquisitions.
1. Understand sellers overprice due to emotion and optimism
Sellers tend to overprice their businesses, and it's important to recognize this as a common behavior rooted in both emotion and optimism. Much like in real estate, business owners often believe their company is worth more than the market would justify, driven by personal attachment and theoretical future potential. They might also evaluate based on potential revenues or expansion plans that haven't materialized yet.
As a buyer, you need to approach negotiations with the understanding that sellers naturally inflate the price based on these emotions. When sellers focus on future possibilities and not just the hard data, it creates a disconnect between their expectations and the realities of the current market.
This gives you leverage to introduce a lower offer that's grounded in actual numbers and achievable outcomes, helping you position an underbid in a way that feels logical and fair.
Related: 10 Questions You Must Ask Before Buying a Business
2. Uncover the hidden data during due diligence
There is always hidden data that must be uncovered during the due diligence process — information that doesn't show up in initial conversations but is crucial to determining the business's true value. Some buyers wait until after the letter of intent is issued to dive deep into financials, but taking a proactive approach can help solidify a stronger negotiation position earlier.
Request financial breakdowns, ideally three years of monthly cash flows, and examine numbers beyond creative accounting or GAAP financials. This allows you to assess the business's real cash-generating ability. Analyzing the actual cash flow data will help you calculate a realistic multiple and adjust your offer based on the business's true performance.
With this understanding, you can confidently justify a lower offer based on the underlying financial health of the business rather than surface-level numbers.
3. Leverage client retention and churn to your advantage
Client retention and churn rates are key factors that can often be spun by sellers to paint a more optimistic picture of the business. If retention is low or churn is high, sellers will often have explanations for why that's the case — maybe they're citing one-off events or special circumstances. Regardless of the reasoning, this presents an opportunity for you as a buyer.
Client retention directly impacts the company's future revenue stability, and high churn is a red flag for long-term profitability. Use this as a point of friction to negotiate a lower price. If you're facing vague explanations around churn or any inconsistency in customer satisfaction metrics, it's a perfect opportunity to justify a strategic underbid.
The key is to frame your reduced offer as a reflection of the risks that low client retention brings, ultimately protecting yourself from overpaying for unstable revenue streams.
Related: Make Your Next Negotiation a 'Win-Win.' 3 Tips for How to Do That.
4. Factor in industry and market risks
One area where sellers often overlook or underplay risks is the state of their industry or broader market trends. Business owners can be oblivious to potential industry shifts or, worse, try to hide these risks during negotiations. However, as a buyer, you need to have a clear understanding of both the short-term and long-term risks in the industry you're entering.
Take the example of Blockbuster, which was once a powerhouse before it was blindsided by an industry shift toward digital streaming. Sellers might be hesitant to admit that their industry is facing disruption, but these shifts present a strong case for a lower price.
Conduct thorough research on the competitive landscape, emerging technologies and changing consumer behaviors within the industry. Then, use these insights to highlight potential risks to future earnings, giving you additional leverage to reduce the price. Being realistic about the future of the industry can lead to an offer that reflects its true long-term viability.
Related: When Acquisition Deals Go Wrong
By following these four strategies, you can confidently employ a strategic underbid without jeopardizing the deal. Understanding the seller's inflated expectations, uncovering hidden financial details, highlighting risks like client churn and leveraging market dynamics all contribute to a successful negotiation that benefits both parties. With the right balance of tact and assertiveness, you can secure a business acquisition at a price that reflects its true value.
