I've Just Been Approached To Sell My Business!

In today’s active M & A (mergers and acquisitions) market, it is very likely that a business owner will receive a knock at the door with an offer to purchase his business.  If the business owner has thought about selling, this could be the opportunity he has been waiting for.  If he was not thinking about selling, it might be worth exploring, as “anything is for sale for the right price.”

The most important step for a business owner to take when approached by a buyer is to protect the future of his business.  Many buyer inquiries do not translate into successful transactions.  Meanwhile, during the months of negotiations, the business owner has focused on obtaining a value for the business, meeting due diligence requirements, exploring his future with the buyer, reviewing and considering multiple layers of contractual documents, and attending endless discussions and meetings to try to complete a deal.  This time away from the business usually affects its ongoing operations and financial results – not to mention the incurred cost of professional fees.

A large corporation may be interested in purchasing your business, not for its historical profits, but for its future potential.  This potential may bring the buyer a healthy return on the investment of the purchase.  The corporation may also be interested to fill a need or void within its own organization.  It is important to note that the value of a business will be based on the future, as seen by the buyers.

What if the potential buyer is a competitor?

A competitor may be interested in your business for many reasons, including:

1. To increase their market share;
2. To expand their product or service lines;
3. To gain access to more and/or better equipment;
4. To obtain larger or more modern facilities;
5. To acquire better sources of supply;
6. To access highly skilled and competent employees;
7. For a better ROI; or
8. For industrial espionage reasons

There are three different types of competitors:  direct, indirect and near competitors.  A direct competitor is one who competes with you with the same product, in the same market.  An indirect competitor will be in your market but with an alternative product.  A near competitor will market a similar product but in a different market.

It is very important to remember that not all competitors are buyers.  Some are simply looking for information.  It takes years of experience in the merger and acquisition field to be able to negotiate a transaction between competitors that is fair and equitable to the seller.

If a competitor claiming to be interested in buying your business approaches you, you should consider your next steps carefully. 

I advise my clients to say nothing until a comprehensive confidentiality agreement, prepared by a competent intermediary or an experienced transaction lawyer, is executed by the competitor, containing non-interference provision to protect employees, customers, suppliers and proprietary information.  Do not provide customer lists, employee names, supplier lists, equipment lists or detailed financial information until a purchase agreement is in place and you are comfortable that the buyer is sincere in completing the transaction.  Once you agree to allow the buyer to initiate the due diligence process, keep the process to a tight agenda and firmly under your control. 

Never hesitate to ask questions of a buyer.  What is the method they will be using to determine the value of your business?  What earnings multiple will they use?  Why are they interested in your business?  Do they have a long-range business plan?  How does your business fit into those plans?  What about a management team?  What financing are they planning on using?  Will they provide you, or your professional team, an opportunity to confirm their financial capacity?  Will they provide you with information about their business, including a tour? 

We recommend to our clients that they prepare in advance for the day they will sell their business.  This preparation includes organizing a professional team that will help to obtain the highest value for the business.  If you do not have your team in place, we recommend that you retain a lawyer familiar with transaction law, a business intermediary to qualify the buyer’s interest and negotiate on your behalf, and an accountant who has the capability to provide a realistic estimate of tax liability that will occur based on the various transaction structures. 

If you have been approached, it is important to take the time to prepare yourself and your business to handle negotiations.  Rushing to sell your business can result in a failure to obtain the true value of the business, as the best time to sell is when you don’t have to.

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