Many business owners are approached by individuals or groups wanting to buy their business. And they often wonder, what is the best course of action for a business owner to take in this situation? What should they definitely do, and what should they avoid?
Here are some steps that may be helpful in successfully navigating an offer:
Step 1: Are they serious? And are you ready?
You’ve received an unsolicited offer to buy your business. Chances are you’re feeling excited and a little proud. You aren’t even on the market, and someone singled you out as a desirable business worth acquiring. That’s worth feeling a little smug about.
Now, pause and take a deep breath. Your first step is to determine if you’re dealing with a serious offer. Does the company look legit? Does the letter sound like they’re specifically interested in you or a business like yours?
If the details seem vague, or if the sender has a limited presence online, they may be on a fishing expedition for competitive intelligence. Or, it could be from an M&A firm that’s just trying to drum up business for their sell-side division.
Equally possible, however, is that a buyer has engaged an M&A firm to find acquisition targets that meet a certain criteria. The buyer is serious — but they may have sent out a lot of those solicitations, looking for businesses that will bite.
Determining just how “real” an offer is can be difficult. Doing your homework to ensure the offer is valid and appropriate is an important first step.
But perhaps the bigger question you need to ask yourself is this: Am I ready to sell? Are you emotionally and financially prepared to transition your business? And is the business itself in a good place to transition?
Step 2: Initial planning for a sale
Part of planning to sell your business is preparing for what’s next. What will you do after a sale? Do you want to stay involved in some lesser capacity? What about other family members involved in the business?
What will you do with the proceeds? And will those proceeds be enough to fund your retirement and estate goals? Remember that what you need for retirement is just that — it’s not the value of the business.
Talk to your advisors about different ways the deal might be structured and how fast you are likely to get paid for your business. Will you have to provide seller financing or an earnout? Will you sell the real estate with the business?
Think about whether your priority is to get the highest value overall (even if it means a long payment period) or if you’re more concerned about getting all cash at close. The answers to those questions can have a big impact on your tax and retirement planning — including whether or not you’re even able to sell.
Step 3: Assemble your team
Let’s suppose you’re feeling ready, and you want to pursue the offer. In many cases, the people who reached out to buy your company are professional buyers. They’ve purchased many businesses, and they know what it takes to negotiate deal terms in their favor.
Think of it this way: Even though you know how to hit a baseball, you aren’t going to do well if you step up to the plate against a big-league pitcher. That’s why it’s a good idea to gather a team of professionals around you, and quickly. There are a lot of dangers a potential seller can fall into, from locking yourself into exclusive negotiations to exposing sensitive information about your business, risking confidentiality and more.
Who’s going to come together with you to help this process be successful? Typically, your team should include an M&A attorney with experience in your industry, a CPA firm — including an M&A tax accountant and a wealth advisor — as well as an investment banker or transaction advisor.
Don’t worry that you’ll put the buyer off by hiring representation. They want you to get assistance; legitimate, ethical buyers know that professionals make the process go smoothly. Your CPA firm will speak the same language as their due diligence team. An attorney familiar with transactions will return documents quickly and respond with deal terms that are normal and customary for your industry.
Responsible buyers will perform a thorough due diligence process to understand your business and verify it really does have the value they think it has. Typically, people think of due diligence as only financial, but modern buyers will want to understand many aspects of your business, including HR, employee standards, proprietary technology, customer contracts, real estate appraisals and environmental impact.
The more you can do on the front end to organize, gather documents and prepare for those conversations, the better. Time is of the essence, as slow-moving deals generally increase cost and induce fatigue in all parties.
Step 5: Execute
The start of the sale process is exciting. Initial meetings and outreach are fun and engaging. Everyone is interested in your story, and they’re telling you nice things about your company and your team. But once you sign an engagement letter, that’s when the real work starts.
Selling a business takes a lot of effort. It’s paperwork and due diligence. Meanwhile, the buyer is going to be carefully investigating your company to be sure they are justified in making the investment. Such scrutiny, while necessary, can be unsettling.
In addition, it can simply be exhausting to manage the transition process and effectively run a business. After a while, deal fatigue starts to set in. And that’s when you risk making poor decisions. When you start to feel worn down, like “I just want to be done with this,” that’s when you’re most vulnerable.
Here again, your deal team can help. Be mindful of pace. Both you and the potential buyer should be moving at a good clip through outstanding issues without feeling rushed or pressured.
Tips to keep in mind:
- Be careful about how you respond to an unsolicited offer. Don’t reveal too much. Make inquiries and investigate the interested party.
- Don’t go it alone, particularly when you’re up against professional buyers. They are not negotiating in your favor, and there are a lot of potential pitfalls.
- Don’t sign any agreements until you’ve consulted with qualified counsel, an investment banker or transaction advisor who will help protect your interests.
- Be sure you’re ready. Understand the financial, emotional and family implications of a sale. This isn’t the time to be a tire kicker. Cost, confidentiality risks and soured relationships can jeopardize your business if you decide to abandon good faith negotiations part way through.
How Wipfli can help
Wipfli has a robust business transition group with specialists in all manner of transition planning and ownership transfers — including sale to a third party, management buyouts and family transitions.
Contact us for help navigating a successful sale that maximizes value and delivers on your best interests.
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