In speaking with a lot of owners of private businesses, I often hear stories of them being approached – seemingly out of the blue – by someone knocking on the door and looking to buy their business. Whilst it is no doubt flattering that a business has attracted interest from a large, successful player, this can be a delicate situation for the unprepared. If not handled well it often leads nowhere, leaving the person who was approached feeling vulnerable or even used.
Why does someone want to buy your business?
There are several reasons why an individual or company may want to buy your business. Some may be looking to expand their product range or geographical footprint. Others may be looking for a vertical integration and the synergies that would come from that. A number are opportunistic – looking to get your business at a cheap price or even worse, trying to get an inside look at your business with no intention of buying it. Whatever the reason, there are some steps you need to take to make sure whatever happens is in your best interest:
1. Stay cool – you are always NOT for sale when approached!
It’s your business and you are NOT for sale – even if you might be prepared to consider it, your initial position is that you are never for sale at this point! If someone is asking questions about your business, you are under no obligation to answer them, you simply switch the interrogation and begin to qualify the nature of the interest by asking the alleged buyer some questions aimed at establishing the nature of their interest. For example, what they are looking for and why? Have they acquired before? What do they know about your company? The sector?
It’s vital that you characterise the nature of the interest and the quality of the people behind the approach before discussing much at all.
2. Take it slow (at first)
Your business is probably the most valuable asset you will ever own, so take your time and think about what you want before you decide when and how to proceed. Deals are done in stages – you only ever have to go to the next stage, not beyond. There are a series of important personal questions you should ask yourself and perhaps discuss with your family before you seriously engage in any discussion about terms with a potential buyer. What do I want to do? What involvement if any will I want or require post-acquisition? What will I be able to get out of a deal and over what time frame and is that enough to make it worthwhile? Any no doubt many more…….
3. Get the right advice
You are (hopefully) not alone in running your business. Your trusted advisors, such as your accountant, lawyer, or board members, probably have some experience when it comes to selling a business and can provide useful input in certain aspects. Also, talk to a dedicated corporate advisor – buying and selling private companies is after all what they do! This is specialist work and you have a lot at stake, so it’s worth getting this professional advice.
4. Don’t show all your cards
One of the biggest mistakes I see owners make when approached by an acquirer is that they lay everything out on the table for them immediately. They or their advisors prepare an Information Memorandum (IM) detailing every part of their business – who their clients and suppliers are, what margins they make, who the key people in the business are, etc. We think this information is valuable and should be earned. Resist telling an acquirer any information that you wouldn’t want your direct competitor to know – once this particular box is opened it can never be closed!
On the other hand, the next most common mistake (if you are open to considering your exit options) is to tell the potential acquirer absolutely nothing at all – this normally ends with nothing happening.
The appropriate middle ground between these two extremes is to perhaps share certain high-level information about your business without compromising anything too sensitive. This information should be exchanged in return for important information about the nature of the acquirer and the exact nature of their interest.
5. Know the value of your business – or at least a likely valuation range
Every industry, and even every business and different buyers will often approach valuation differently. Some companies are valued by net profit, others by gross profit, and some by recurring revenue or non-monetary business metrics such as the number of contracted clients etc. It is important to know how businesses in your sector are being valued and what the aggregate or range might be for a valuation in your sector. This should give you some guidance as to how your business may be valued by a potential acquirer. A good M&A advisor will be able to get you across this information for you.
6. Find out if there are any other buyers in the market
We think that the odds are very long that the buyer who knocks on your door will be the right buyer, willing to pay the right price on the right terms. It may require you to look at the broader market and establish if there are any other strategic acquirers currently in the market. The reason that many owners at this point stick with one potential buyer is the very real concern that their intention to exit might be compromised and therefore becomes more widely known. This is a genuine and valid concern. For information on how to get past this issue read this.
Even if you are thinking about sticking with the initial approach, then get some quality external input. A good advisor will save you money and time even when you think you have the right buyer – a fee agreement should be cost neutral from this point (meaning that the improvement in terms from hiring an advisor should at least off-set the cost) and a good fee agreement is likely to give you a multiplied return on fees as well as good support and peace of mind.
Importantly, your advisor will help close negotiations down promptly if things are going nowhere – buyers are notoriously slow at doing this, which will waste your time and energy. Good advisors will cut through the waffle.
7. Be able to articulate the future of your business
Once you are satisfied that you are dealing with a genuine strategic buyer who has been correctly qualified, then you will want to get down to the business of negotiating.
All a buyer is really doing when they buy a business is buying the future. A business is an organic asset with many moving parts. A buyer is looking to make a return on their investment, so it is important that you can articulate the future of your business to help acquirers to understand the enduring and sustainable value of future ownership. This will require you to articulate your strategy, detail your plans and discuss how you are executing against those plans – your plans must be logical, reflect reality and will be capable of standing up to some scrutiny. This requires a bit more than a conversation where you articulate a vague notion of where you might be headed. If that’s what you are relying on, you will be leaving money on the table as even if a buyer wishes to proceed, they are likely to have factored into their valuation as an element for heightened risk.
At the end of the day, it’s your choice
If you take nothing else out of this article today, remember this: until you have secured a detailed indicative offer in writing you have nothing, and even then, its likely to be subject to contract and due diligence. Nevertheless, this is a big step forward; it’s an important and necessary step to establishing if all the posturing has been worth it! So, get an offer in writing and make sure you understand what is meant by everything contained within before you start to negotiate further. If the gap in the offer and terms are just too large now, is the time to walk away. If you have followed the advice above, you will not have provided anything too commercially sensitive, and matters will have been contained amongst a small, tight group.
Remember, even if you like the offer and terms, there is perhaps a further 12 weeks from this point to conduct due diligence and contract negotiations. Nothing has happened until you sign the contracts and been paid your consideration. How to conduct matters during due diligence will be covered in a future blog.
If you want to know what to do to be ‘succession ready’, click here to read our blog on “Succession Planning – a practical approach”, or if you have been approached and want to talk through what’s going for you at the moment call myself or one of the team at Oasis Partners on 02 8599 3442.