What To Do When Approached

What would you do, if a buyer approached you to buy your business?

In today's active M&A (Mergers & Acquisitions) environment, it is not uncommon for business owners to be approached by someone interested in buying their business.  For some owners, this is an inquiry worth exploring, as "anything is for sale for the right price".

We recommend to our clients that they prepare their business for a sale before opening discussions with a potential buyer. However, if you have been approached, it is still important to take the time to prepare yourself and your business to handle negotiations.

When a corporation is interested in purchasing your business, they will not be interested in buying it for the historical picture, but for its future potential - the potential to bring the buyer a healthy return on the investment of buying it and perhaps to fulfill a need within their own organization.

The value of a business will be based on the future - as seen by the buyer.

The potential corporate buyer will estimate their return on investment by looking at such things as the cost of borrowing money, the degree of risk involved in the transaction, the need the acquisition will fill, and the future expectations of profit.

How a particular business measures up to other similar operations in the same industry can also greatly affect the value a buyer will put on a business.

When a business is sold, the seller's goal and buyer's goal are naturally opposite - the seller wants the highest purchase price possible and the buyer wants the highest return on investment possible - and a lower purchase price means less risk to the buyer in achieving a strong return on his investment.

1. Be reasonable about the value of your business. Also take the time to ensure that you are being offered a reasonable value for your business.
2. Carry on business as usual. A healthy business is a desirable business.
3. Keep the sale process confidential. Make sure any potential purchaser signs a confidentiality document.
4. Prepare for the sale in advance. Ensure your records are detailed and complete for the past few years. Do a physical clean up. You never know when the right buyer may come “knocking at the door.”
5. Anticipate information the buyer may request. In order to obtain financing, the buyer will need appraisals on all assets, plus information to satisfy any environmental regulations that may apply. Environmental issues are delved into by a prospective buyer intensively because of their relevance and their importance in maintaining a good corporate citizen standing in the community.
6. Achieve the highest price through buyer competition. This can be tricky, and we advise you to use a third party to create a competitive situation with buyers to position you for the best transaction value.
7. Be flexible. Don't be the kind of seller who wants all cash at the closing, or who won't accept any contingent payments or an asset transaction. Your intermediary and your accountant, with their knowledge of financing and tax implications, will give you the best advice for your transaction.
8. Negotiate! Don't dominate the deal. You may be used to being your own boss, but the buyer may be used to having his way too. With your intermediary's help, decide in advance when to hold and when to fold.
9. Keep time from dragging down the deal. To keep the momentum up, work with your intermediary, your accountant, your lawyer and other experts who may be required so that potential buyers stay on a time schedule and offers move in a timely fashion.

Be willing to stay involved. Even if the process has been exhausting, realize that the buyer may want you to stay within arm's reach for a while. Consult with your intermediary to determine how you can best participate in the transition process.

What if the potential buyer is a competitor?

There are 3 different types of competitors: direct, indirect, and near competitors.

• A direct competitor is one who competes with you with the same product and in the same market.
• An indirect competitor competes in your market but with a substitute for your product; and
• A near competitor may market a similar product in the same market or the same product in a different market.

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

• To increase their market share
• To gain access to more and/or better equipment
• To obtain larger or modern facilities
• To acquire better sources of supply
• To access highly skilled and competent employees
• For a better Return On Investment (ROI)

It is important to remember that not all competitors are buyers. Some are simply looking for information. It takes years of experience in the mergers and acquisitions profession 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, consider the following procedures:

• Say nothing until a comprehensive confidentiality agreement prepared by a competent intermediary or an experienced transaction lawyer, is executed by your competitor containing non interference provisions to protect your employees, customers, suppliers and proprietary processes and procedures.
• 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.

Do not hesitate to ask questions of the inquirer. 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 or transfer their business to their children. Part of this preparation includes developing a professional team that will help to ensure that you obtain the highest value for your business. If you are approached to sell, and do not have your team in place, we recommend that you retain a lawyer familiar with transaction law, a business intermediary to qualify the inquirers interest and negotiate on your behalf, and an accountant or business valuator that have the capabilities to provide you with a realistic range of value for your business.

In today’s active M & A environment, it is not uncommon for business owners to be approached by someone interested in buying their business. For some owners this is an inquiry worth exploring. The most important step for a business owner to take is to ensure the future of his business. Many of these inquiries DO NOT translate into successful transactions. Meanwhile, during the months of negotiations, the business owner has focused on obtaining a value for his business, meeting the due diligence requirements, exploring their future with the inquirer, reviewing and considering multiple layers of contractual documents, and attended endless discussions and meetings to try and complete a deal.

Our most important recommendation to any business owner, who has been approached to sell their company, is to not lose sight of the business. While there is value to being actively involved in the negotiations, it is equally important to stay involved with the business and ensure that it remains a healthy ongoing concern with a positive ROI outlook for any potential buyer.

1. Be reasonable about the value of your business. Inflated expectations interfere with your professional’s ability to negotiate the best value for you.
2. Carry on business as usual - don't become so obsessed with the transaction that you ignore day-to-day demands affecting sales, costs and profits. Your eventual buyer will need to see a healthy business.
3. Keep the sale process strictly confidential. A breach of confidentiality surrounding the sale of a business can change the course of the transaction. Make sure any potential purchaser signs a confidentiality document.
4. Prepare for the sale in advance. Ensure your records are detailed and complete for the past few years. Do a physical clean up. You never know when the right buyer may come “knocking at the door.”
5. Anticipate information the buyer may request. In order to obtain financing, the buyer will need appraisals on all assets, plus information to satisfy any environmental regulations that may apply. Environmental issues are delved into by a prospective buyer intensively because of their relevance and their importance in maintaining a good corporate citizen standing in the community.
6. Achieve the highest price through buyer competition. This can be tricky, and we advise you to use a third party to create a competitive situation with buyers to position you for the best transaction value.
7. Be flexible. Don't be the kind of seller who wants all cash at the closing, or who won't accept any contingent payments or an asset transaction. Your intermediary and your accountant, with their knowledge of financing and tax implications, will give you the best advice for your transaction.
8. Negotiate! Don't dominate the deal. You may be used to being your own boss, but the buyer may be used to having his way too. With your intermediary's help, decide in advance when to hold and when to fold.
9. Keep time from dragging down the deal. To keep the momentum up, work with your intermediary, your accountant, your lawyer and other experts who may be required so that potential buyers stay on a time schedule and offers move in a timely fashion.
10. Be willing to stay involved. Even if the process has been exhausting, realize that the buyer may want you to stay within arm's reach for a while. Consult with your intermediary to determine how you can best participate in the transition process.

A few of the important keys to success in business are self-reliance; innovation to match new demands with new solutions; and keeping abreast of the latest equipment and processes that can produce materials or services to be delivered to the customer faster and more efficiently. With these types of demands on you, we recommend you hire a team of professionals to take care of the sale of your business.

Preparing your business for sale, like preparing your home, can be done quickly or in stages that attend to all the details of preparation. Rushing to sell can result in a failure to obtain the true value of the business.

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