I regularly hear from business owners that they have been approached by or are speaking to an interested buyer. Sometimes they want to discuss this and are interested in advice or my opinion. In this article, I will give some thoughts about what can be useful for a business owner to consider in such a situation. The objective of this article is to prepare business owners for a business sale and to help them to get insight into the consequences of entering discussions with an interested buyer.
The first question is, who approaches you, and what is their story? There is a difference between being approached by an advisor or a direct buyer. It is important to know who the real interested party is and what their strategic rationale is. Why precisely do they want to acquire your company and how well thought through are their strategy and the fit with your company?
Having a good understanding about the interested buyer, the ‘fit with your company’, and the background of their M&A activity is important. Resources like Bureau van Dijk, Pitchbook, or Mergermarket can give you this important information. However, most business owners will most likely not have access to these platforms. One can get the financials of the interested party, to see how strong their balance sheet is (equity, debt, and possibly cash available for acquisitions). Further, this process might give you an overview of historic transactions your potential buyer has completed and often at which value or deal multiples.
Although you might be flattered by the interest, an important question should be if you are really planning or willing to sell your company. If you have doubts about the timing and your own level of interest in selling your company, I would suggest not entering discussions. These processes take a lot of time and once you jump on a riding train it is difficult to get off…
What do you know about the process? What do you expect your opponent knows about the process? How often have they executed a business sale and how often have you? Just because you are exceptionally good at running a company, does not mean that you are good at selling a company. If you manage to discover crucial items during the process it might be too late. All there is to know you should have upfront or have an advisor that knows the potential pitfalls.
As an example, what if a banker working on securing required financing for a potential acquisition for your transaction informs you that their investment bank would be able to get you 2 or 3 million euros more for your company than the current buyer has agreed? Would you believe this statement, start hesitating or try to renegotiate the value of the transaction? Hence, it is good to know a potential value upfront, so you are confident that the parameters and valuation of the deal are adequate before you proceed.
Do you have a clear idea about the funding capabilities of the interested party? Will they be able to pay the larger part out of their own funds? Will they be able to arrange acquisition financing? If not, the business sale process with this one interested buyer can stop and all the work is done in vain.
How does a buyer look at the required working capital? Might they use the working capital as a negotiation item to decrease the value they pay for your equity? Do you know your own situation about available cash and debt in the company? Do you know what normal working capital is for your type of company? If not, it might mean you end up getting up to a 15% lower value for your company without realizing this.
We have written an article about the different type of advisors that can help in the sale of your company. Another alternative that business owners opt for is selling their companies themselves. If you want to read more about who can help in the sale of your company, please visit the article: http://www.corporatefinanceineurope.eu/sell-business/who-help-sale-company.htm
There are definitely some clear risks and disadvantages to speaking to only one buyer. Here is a list of the possible risks and issues:
A few years ago, I wrote an article with examples of transactions that I have seen over the last few years where sellers executed sales themselves. The outcome can be positive and satisfactory, but mostly it has a disappointing result. You can read more here: https://www.corporatefinanceineurope.eu/blog/selling-your-company-yourself.htm
Based on our practical experience, one can see that doing a business sale oneself can work. It is possible to stumble into, or come across, the right buyer. However, there are also significant risks. The safest bet is just to appoint an advisor that supports you in the sales process. It will give you the highest chance of a successful sale under the best conditions.
What is your opinion on how sellers should act when approached by an interested buyer?