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By: Sam Thompson, CBI, M&AMI
You’ve worked endless hours building your vision. You’ve created a team, fine-tuned a product/service and have navigated the many obstacles a business encounters. Your focus has been on growing and improving your business. Then, out of nowhere, a potential buyer contacts you.
You’re flattered, excited and of course, you need to know more. What should you do?
SLOW DOWN!!
Should you decide to begin the process with this interested party, here is what you need to know:
You Want to Be in Control of the Selling Process
When you decide to talk to only one potential buyer, you’ve given all of the leverage to this one particular buyer. That is exactly what the buyer wants. A buyer with leverage will have you follow their timeline, which normally is slow. They will be patient and will drag out the process. More than likely they are looking at other deals and not just yours. The buyer is in control.
The Buyer Knows You Don’t Have a Strategy
Your one buyer knows you have not thought through a strategy and are waiting for a big juicy offer. You start providing what they need including your financials (tax returns, P&Ls, balance sheets and AR/AP aging reports). There is a chance you’ll receive a non-binding letter of intent (LOI) and because this is all so new, you’ll think you’ve sold your business once the LOI is fully executed. Not so fast, you have a ways to go.
Get the Best Price for Your Business
Many business owners don’t know what their business is worth, and you may not know either, yet this offer seems reasonable to you. When you decide to talk with only one buyer, the offer they’ve made is based solely on historical financials (EBITDA with a multiple). To maximize your price potential, you need to sell your business in a structured process with multiple buyers fighting for your attention. You then will have offers based on the perceived value of your business and not on the value based on paper. We have found when a structured process is used to sell a business, the seller receives 10-20% more than was expected. In one transaction last year, a seller we represented received 89% more than he expected!
Now that the LOI is in Place, What’s Next?
This all depends on what you’ve agreed to with this one buyer. Hopefully you’ve gotten legal guidance before you signed the LOI. Buyers want you off the market so they can perform their due diligence; this could be as long as 90-120 days. When you have multiple buyers in a structured approach you can demand a shortened, less disruptive due diligence period of 45-60 days.
Once due diligence begins with this one buyer, they know you don’t have another buyer waiting for their deal to blow up who will then take their place. There is a chance they may dig and delay. If they find issues during due diligence, they may demand a lower price (known as retrading). In a structured approach, where you as the seller has a strategy, your advisor will have prepared a very thorough Confidential Information Memorandum (CIM) that should minimize any retrading. The CIM provides various details on your business such as an organizational chart (no names), customer concentration and an asset list.
What Should a Business Owner Do When Randomly Approached to Sell?
Learn as much as you can about this acquirer. Ask what other transactions they have done and see if they will allow you talk with owners of businesses they have previously acquired. Disclose as little as possible and make sure to talk with an advisor such as a transaction attorney or M&A advisor before you sign any non-disclosure agreement. Remember, about 50% of transactions agreed to actually make it to closing.
To get the best results when selling your business, strive to have an exit plan in place by connecting with an Exit Planner or Coach. The day you decide to sell you need to be in control.
By Sam Thompson, CBI, M&AMI
Sam is the president and founder of M&A firm Transitions In Business. He is a Certified Business Intermediary (CBI) and a Mergers & Acquisitions Master Intermediary (M&AMI) who has helped countless business owners successfully sell their company. Transitions In Business is a Minneapolis based M&A firm who specializes in selling privately held B2B, healthcare, transportation, manufacturing, distribution and construction/trade services businesses in the lower middle market.
