Two weeks ago I sat down with a client who confided that he’d been approached by someone wanting to buy his business. He hadn’t been thinking of selling, but he was open to hear what the interested party had to say.
“How do I go into this meeting without blinders on?” he asked. “What do I need to know?”
It was the third time in a matter of months a business owner had called me after being approached. With capital readily available at historically low borrowing rates, it’s becoming more common to receive an offer that’s unsolicited.
Would-be buyers are either competitors looking to achieve scale or a larger proportion of market share, private equity investors wanting to partner and grow the business, or investment bankers representing an interested buyer.
Being approached can put business owners in a tough predicament. You don’t want to lose an opportunity, but you’ve spent years growing your business, taking risks and making sacrifices. You may not feel prepared to sell, or maybe the idea of selling today is in stark contrast with your longer-term succession plan.
When my clients look to me for advice, they want to know – apart from whether to sell – how do you distinguish credible buyers from tire kickers? The goal of these preliminary discussions is not to put a deal together, but to determine if there is something worth exploring.
If you do get approached, here is some of the recent guidance I provided.
Know what’s piquing your interest: Did a competitor recently sell for a strong value and it got you thinking? Does this buyer offer something strategic – like a broader customer base or access to better suppliers? Does the timing feel right? Whatever the reason, know what it is before you enter a discussion.
Find out their rationale: Why do they like your business? What is their strategic plan? Asking lots of questions will help you assess whether a transaction is something you want to pursue.
Confidentiality is key: Make sure your information is protected. And if you’re going to share it, ensure there is a confidentiality agreement in place that protects your people and customers. Also, be strategic in what you share. At this stage, you should provide only the information necessary for the buyer to make a preliminary assessment. For example, a financial summary highlighting a few years.
Ask for their approach to value: This doesn’t mean negotiating the exact purchase price right out of the gate. It means understanding how the buyer will get to a price and typical methodologies or deal structures they’ve used on prior transactions. Getting this out in the open quickly can save a lot of time and energy. If you’re not getting a clear answer, it could be because they haven’t bought a business like yours before, they are not serious or their intentions aren’t true.
Don’t pay to have a discussion: There have been instances where international investment banking firms have reached out to local businesses saying they have a buyer but require investment for a preliminary analysis. If they do have a legitimate buyer, it shouldn’t cost you a penny. Don’t forget, they approached you.
Think strategically about how to position your business: For example, the buyer may ask for five years of historical financials, but you made a significant capital investment three years ago that dramatically improved cash flows and decreased cost structure. Your financial results from five years ago may not be relevant to the business you run today.
While opportunities may abound, it’s too difficult to say whether taking that first meeting with an interested party will result in the sale of your business. Sometimes even a serious buyer is not the best fit, and other times the process needs to be open to more than one party to find the right fit and get a competitive price.
As for my client who was approached recently, the process is still ongoing. For him, he saw no harm in entertaining an offer once he was well prepared to do so. At the very least, he may come away with a better sense of what his business is worth and an understanding of how he really feels about the prospect of a sale. •
Erica McGuinness is vice-president at Sequeira Partners Inc., where she advises clients on transactions, and board director of the Association for Corporate Growth.
