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Approach from an interested buyer? … The Do’s and Don’ts

Background

Business owners occasionally receive approaches from other companies expressing interest in buying their business.  Such approaches are often welcome; in fact sometimes business owners have been hoping for such an approach for many years.

The way the approach is handled from the outset will be critical to the outcome.  If it’s badly handled by you, you will get a poor result or more likely no result. However it’s worse than that – there are significant risks in going down this path and they need to be carefully managed.

“I cannot stress enough for the entrepreneur to think carefully about it. If you decide to go ahead.... do it with every ounce of blood, get a professional business sale advisor and proceed to succeed in the transaction.” 

- Tim Moore, Founder and former Chairman, Photolibrary   

Most business owners have never sold a business before and have no experience of the complexity of the process. We’ve lost count of how many times an owner has said to us after completion of a sale that they’re amazed how challenging and time consuming the whole process was right up to completion.

After all most of us hire experts to market and negotiate the sale of our homes, yet we somehow think that because we know the business better than anyone else, we also know how to market and negotiate its sale, a much more complex transaction!

Some Do’s and Dont’s

We’ve provided below some DO’S and DON’TS especially for the early stages after an approach. Handling the initial exchanges poorly will substantially reduce the likelihood of an attractive deal being consummated, either now or in the future. It may also put your business at significant and unnecessary risk.

DO always be courteous and professional in your dealings with the buyer. It will help greatly if a deal is to be done now, but even if that doesn’t happen you probably want to keep the door open to this buyer for the future.

DO most importantly sit back and reflect on whether you should sell the business or not if a reasonable deal was on the table. There’s no point starting down the path just to see what a buyer might pay, the process is too time consuming and risky. Unless you have a genuine willingness to deal you should tell the buyer “thanks but no thanks”. If you do state that, they’ll probably still be interested when you are ready.

DO ask lots of questions upfront to establish how serious they are, such as:

  • How much do you know about my business & industry?
  • Why are you interested in my business?
  • Have you also approached any of my competitors or peers?
  • If you were to buy my business what would you plan to do with it?
  • Have you made other acquisitions recently, if so tell me about them?
  • If you’ve made acquisitions in the past how have they worked out?
  • How would you finance this deal if it was to proceed?
  • How would you expect to structure any deal, how would I be paid?

DON’T agree up-front to a period of exclusivity in which to conclude a deal. The buyer will come up with various reasons why this is necessary.  In reality it’s usually an attempt by them to avoid the prospect of any competition while they learn about your business and attempt to do a deal with you but without any commitment.

DON’T tell them what you think the business is worth. This may seem quite a reasonable request but if you give them a price at this early stage you will never receive more and typically receive less. It should be up to the buyer to make the first offer.

DON’T provide them informally with preliminary information to allow them to better understand the business.  Of course information will have to be provided if you’re to sell the business. However there are established protocols for exchanging information – you may put your whole business at risk if they’re not followed.

DON’T let the buyer dictate and control the process – a buyer will often outline a process and even a timetable all the way through to completion of a deal. Inevitably this process will be designed to maximise the opportunity for them while minimizing their risk along the way. In reality the process should be negotiated between the parties.

DON’T let them talk with any of your staff or customers. This is similar to the information exchange but even more sensitive. You need to be extremely careful about how you deal with staff in this situation – a careless word, let alone an interview with someone who may turn out to be a tyre-kicker, can seriously damage your business.

DO form a view on approximately what you think the business is worth and what you’d sell it for. This is probably a good time to speak with an experienced advisor.  He or she will help you to understand the likely structure of any deal, because most business transactions are structured (i.e. it’s not just 100% cash at settlement and you walk away). Also an experienced advisor will be able to provide you with an informal market appraisal.

DO immediately appoint an experienced advisor to represent you in the process.  This sends a clear signal to the buyer that any deal will be done on a level playing field.  It also sends a positive message to the buyer that you are genuinely interested in their approach and probably makes it more likely that a deal will be done.

An experienced advisor will work with you to ensure that the interaction with the buyer is handled professionally, has the best chance of getting to a mutually agreeable outcome and that you and your business are protected along the way.  Of course there’s a cost and there’s no guarantee a deal will be done, but experience shows that without doubt an experienced and trusted advisor on your side will give you the best chance.

DO discuss with your advisor whether to deal exclusively with the buyer that has approached you or alternatively to also approach other likely buyers. There are many different ways to handle exclusivity but our experience tells us overwhelmingly that some level of competition will achieve a better result, even where the initial buyer still buys the business.

DO develop an exit plan if this approach doesn’t lead to a sale. We’re constantly surprised by how many successful business owners have no plan for selling or exiting their business. You must have an exit strategy if you expect to maximise your wealth.

Case Study

  • An IT consulting business had been repeatedly approached by an interested buyer who had been politely rebuffed.  The business was profitable and growing strongly with excellent prospects.
  • The owners initially believed they would get a better price in the future when the business’ profit was higher. However, eventually they recognised that the strength of the buyer market might not last (and it didn’t) and this was the best time to sell.
  • Federation Capital was appointed as advisor and agreed with the client to conduct a full sale process, which garnered significant interest and several indicative offers. The business was sold in a relatively short timeframe and for an excellent price.
  • The buyer who made the initial approach still bought the business. However the appointment of an advisor and a formal sale process ensured the owners achieved a good result (including having confidence that the market had been tested) and the sale was completed quickly and efficiently.

How Federation Capital can assist you

Federation Capital’s principals have extensive experience working with business owners in the areas of:

  • Strategic options analysis – reviewing your business and forming an expert, objective view of your options concerning a sale of your business, acquiring other businesses and/or raising new funding;
    • Identifying different options for a sale of your business (including for example trade sale, IPO or management buyout) and providing advice on the pros and cons of each option in any particular situation;
    • Ensuring the business is “investment” or “transaction“ ready including preparation of due diligence documents, optimisation of financial performance and identifying and addressing any issues which might adversely affect the process and outcome;
    • Advising on likely valuation outcomes and the many structural possibilities and issues in a divestment transaction (e.g. earn-outs, employment contracts, escrow, cash vs shares,  etc);
    • Advising clients who have received an “approach” and working with them to achieve the best possible outcome;
  • Conducting a competitive business sale process, which will usually include:
    • Preparing an Information Memorandum (and other relevant sale documents)
    • Developing with the client a strategy for identifying and approaching the market of potential buyers
    • Managing the process to achieve maximum interest in a controlled, confidential environment
    • Negotiating and completing the transaction

Need Advice?

To arrange a confidential,  no-obligation discussion, please contact us on:

+61 2 8386 3206 or info@fedcap.com.au

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