Look Out! Stumbles To Avoid When Someone Offers To Buy Your Business
You’re feeling excited and even a little bit flattered – there are dollar signs in your eyes and your pulse is racing- someone has offered to buy your business! Hoorah! Although the moment itself is exciting, you’ll need to take stock and think clearly and strategically about the sales process to come. In today’s Exit To Success blog, we proffer ideas on the steps you should take when someone approaches you with an offer to buy your business.
It’s intoxicating to receive interest or an offer from someone who wants to buy your business. While an initial offer is a great first step, there is still a lot of chess to play before a final agreement is reached between yourself and your purchaser – so slow things down a notch. By avoiding the key mistakes which many business owners make during their sales process, you will retain as much advantage and critical leverage as possible during negotiations.
Key Mistakes To Avoid
1. Don’t Rush
Most acquirers will try to buy your business without competition from fellow would-be purchasers. Once other bidders are involved, there is the potential for the price of your company to increase – and that’s something your purchasers doesn’t want. They will usually ask you to sign a non-binding Letter Of Intent (LOI), which provides the acquirer 2 months of unfettered access to your books to perform their due diligence – during which time you cannot negotiate with any other buyers. The longer this period of due diligence drags on, the higher the chances your buyer will lower their bid knowing that other potential purchasers have moved on. Be careful not to agree to this exclusivity period too early on in your negotiations – advance with the advice of a key advisor only! Eventually, you’ll have to sign a Letter Of Intent, but do so only after a competitive bidding process ensures you’re getting the highest price possible for your company.
2. Get Professional Support
It’s tempting to try to negotiate the sale of your business on your own to avoid the fees of a business sale professional. After all, you’re the one who has built the business from the ground up, and you may be reluctant about handing over a chunk of the proceeds to someone who shows up at the last minute to help you sell your life’s work. Holding this viewpoint is ultimately false economy, as with the assistance of an experienced negotiator you are likely to achieve a far better sales result for your asset than if you ‘go it alone’. Business sale professionals are paid via a combination of a non-refundable “work fee” and a success fee from which the work fee can usually be deducted. The success fee is usually a percentage of the proceeds of a sale – between 5% and 10% depending on the size of the business. So why would you hand over 5% of your company to a person who has done nothing to help you build it?
Firstly, a business sale professional is going to set up a competitive bid process, which will (hopefully) garner you multiple bids. The presence (or even the threat) of another buyer forces the acquirer to sharpen their pencil and it can easily add hundreds of thousands to your deal. Next, a business sale professional is going to act as a foil between you and the buyer. There may be times during the process of selling your business that you want to lean across the table and throttle the guy on the other side. It’s a natural reaction to the clinical approach most buyers take to negotiation. When you feel your temperature rising, you can walk away and let your business sales professional express your displeasure with a cooler head. Your business sales professional can also play the role of “bad cop” when you need to be insulated from a prickly negotiation point and ensure that you stay on good terms with the company you’ll most likely end up working with for a certain amount of time after the sale.
The moral of this story is: don’t try to manage the business sales process on your own. Depending on the size of your business, you will need either a business broker (for a smaller business) or a Merger & Acquisition consultant (for a larger business).
3. Playing Too Hard To Get
Given the likelihood of your purchaser making an offer or presenting a condition which falls below your expectations at some point during negotiations, you may be tempted to rebuff any approach from an acquirer that doesn’t sound immediately appealing – but that too is a mistake. Business buyers have plenty of options available to them, and may dismiss an acquisition opportunity outright if the owner seems overly arrogant or standoffish.
There is nothing wrong with grabbing lunch or a drink with a potential acquirer. At the very least, you can use it as a fishing expedition to learn more about their company. When the conversation turns to your business, keep things high level while gently steering the conversation back to them. If an acquirer asks you a direct question like “Would you consider selling your business?” or “How much do you want for your company?” you can thank the person for their interest and assure them that any offer they make will be taken seriously by both you and your partners. If you don’t have any partners, that’s okay; the buyer doesn’t need to know that, and saying you’ll need to consult your partners will buy you enough time to engage an business sales professional to represent you.
4. Don’t tell your employees too early.
Would you tell your kids that the family is going to Dream World if there was only a one-in-three chance that you would actually go? Once you tell your employees, your business can spin out of control on a sea of innuendo. It’s OK to allow the would-be buyer access to a couple of senior people, but not to your rank and file employees. Only once the deal is certain is the time right to discuss your business sale with your employees.
Without a doubt – receiving an offer from an individual who would like to buy your business is both flattering and exciting. If you play it right – by thoughtfully and strategically structuring your negotiation and sales process – you may be able to turn a casual inquiry into your biggest payday yet.