What you need to know before entertaining an offer for your company.
The market for business transactions is hot right now. You or someone you know may have even received unsolicited inquiries from potential acquirers.
Planning to sell a business is a daunting task that most owners keep scribbled at the bottom of the to-do list, but are you at least prepared enough to entertain an offer? Here are three things you need to know.
Never Compromise on Confidentiality
Before you do anything else today, make sure that your company has a basic nondisclosure agreement (NDA) on file. As soon as you receive an inquiry about your business, you should provide an NDA for the potential acquirer to sign.
Beyond protecting your data, processes and other trade secrets, your NDA should include language preventing solicitation of employees, customers and vendors.
While an NDA is a fairly simple legal document, always use one that has been professionally prepared. Also, because of its simplicity, no legitimate acquirer should balk at signing one.
Be Prepared to Defend Your Business
When you pitch your company to a potential acquirer, you put on your best salesperson’s hat and emphasize the strengths like crazy. However, any weaknesses will be discovered by the acquirer in due diligence. The potential buyer may, in fact, discover problems that you didn’t notice.
So many owners shrug off these concerns, considering them immaterial, irrelevant or “just part of the business.” Even if those explanations don’t scare a buyer away completely, they will drastically reduce the offer price.
Therefore, you should devote the majority of your time prior to the pitch to understanding the most minute details of your company’s weaknesses: causes, effects, expected persistence, actions being taken to resolve the issues and improvements seen from those actions.
The good news is: This is something you’re doing anyway, through exercises like annual strategic planning, right? The earlier you identify and commit to resolving your company’s weaknesses, the more value you’re creating and the less you’ll have to defend in the future.
The Longer the Deal Takes, the More Likely It’ll Fall Apart
The person offering to buy your business likely understands this point and will keep constant pressure on you to keep you interested and engaged for the average six to nine months that it takes to complete a transaction.
Although you may have received an offer, the work to complete the transaction is only just beginning. That first “offer” is almost always nonbinding and comes in the form of a letter of intent, which turns into a memorandum of understanding, which signals the beginning of the true due diligence. After due diligence is complete, the buyer’s offer may or may not substantially change, which starts the round of negotiations and, with any luck, culminates in a final sale contract.
The process is so time-consuming that it might be worthwhile to hire a broker or an investment bank to help you.
Even if you aren’t ready to commit to full-blown succession planning, you owe it to yourself and your company to be prepared to receive an offer to sell.