Written by Neil Ackroyd
So, you have been approached by someone wanting to talk about buying your business. This can be an exciting time but it can also be very stressful and confusing. As owner managers we are often experts in our own field and to a certain extent we can be jacks of all trades. However, in my 16 years in lead advisory I have very rarely seen a fellow owner manager who has experience and skill in selling businesses. It is a very specialist and subtle area and there is a lot that one can do wrong and those mistakes can be the most expensive mistakes of your entire career.
Here are some simple questions to ask yourself, things to consider and steps to take that should help you in this time.
- Take a long hard look inside you and decide whether you really are interested in selling.
In my experience there are only 4 reasons that people complete transactions when selling. You should really consider whether or not you fit into one of these categories.
- Retirement/completing a plan
- Fundamental shift in your life priorities
- The business not being fun any more/outgrowing your skill set
- An exceptional cash offer or exit opportunity
These are discussed in much greater detail in my blog: Selling my business – Do I really want to sell?
If you have decided that you do fit into one of these categories and that it is worthwhile considering the other factors then please read on. If you are only interested in reason 4 and an exceptional cash offer then by be very careful on the other factors and make sure that there is significant evidence that you will get an exceptional offer. A process to sell that is aborted should be avoided and a little bit of professional advice at the earliest possible stage could avoid that (and could even be free, it’s amazing what people will do to build a relationship for the future).
If you genuinely fit into none of the categories or do not believe you will get the exceptional offer that the forth item describes, my strong advice to you is to politely reject the approach, stop reading this blog and get on with your life happy in the knowledge that the path of continuing to run your business is the correct route for you.
2. Look at the person making the approach – are they a real potential buyer?
Here I feel embarrassed for the practice of certain elements in my industry. Some businesses in Corporate Finance believe that it is a valid business practice to write to owner managers claiming to have a client interested in buying your business. Now while some of these letters might well be genuine, the majority of them are a highly disreputable attempt to get you talking about a deal with the intention of you appointing them to broker that deal on your behalf. Do not be fooled by the size of firm also, some quite large practices feel this is an appropriate way to win business. Whilst I have experienced this happening, I have never, and no company I have worked for have ever done this and I abhor it as a practice, it figuratively (not literally) makes my blood boil. That said, my annoyance with it is that it works and clients fall for it. As you would expect the “brokers” who do this are not at the ethical or quality end of the market and therefore the advice that those clients get is often very poor. I have often been left sweeping up the mess left by such individuals and it breaks my heart because it is very avoidable.
The good news for you is that you are reading this blog and can therefore be armed with the ways to avoid falling into this trap.
The first one is very simple, never ever ever appoint someone who approaches you “with a client” to represent you. If you make it very clear to them on their first contact you will never appoint them or pay them any fees you will be amazed how many disappear.
The second way and which is my preferred route is to build a relationship with a reputable and experienced boutique or other advisory firm. Most reasonable firms will not charge you for “building a relationship” and will deal with an approach from another advisory firm for free in the first instance. Again the disreputable ones will disappear as soon as they see that another firm is closer to you and that they are unlikely to get a fee.
In both of these cases the genuine approach from a credible firm will not be phased in the slightest by the fact that you will not pay them (as that would be a conflict with their client anyway) and will be glad to see another credible advisor on the other side as it would make any potential deal far smoother.
If you have been approached by an acquisitive company directly then again your need to consider a couple of things. Acquisitive companies send out two types of letters. The first is an untargeted sector sweep in which they will write to almost anyone in a sector code and when you call back they will consider if you are a business they want to buy. The second is a more considered approach where they have researched specific targets and approached a shortlist who they specifically want to buy having looked at their strategic goals and decided that your business fits these.
Although the second is clearly preferable, that is not to rule out the first as you may well still fit their strategic plan and still get a strategic (high) offer, but the likelihood of that is lower.
In both cases you need to consider the following points
- Has the company made previous acquisitions?
- What companies has it bought and are they comparable to yours?
- What deal structures in terms of up front money and earn outs did they employ (would this type of structure be good for you)?
- Where does their funding come from for further deals?
- What level of individual in the company is aware of and has signed off the approach to you?
The easiest way to find the answers to these questions is to phone the company and ask them. On that call you can also find out easily if you were the subject of a targeted or general approach. This is fairly simple, if it was targeted they will immediately know who you are and have some (even if limited details of your company). If not it is likely a more general approach.
Whilst, armed with this list, you could make the call yourself it is also possible to use a credible advisor. Most will not charge for this initial fact finding call and will also not bind you into any relationship for doing it. In fact many, all the firms that I have worked for included, would do that call and a follow up meeting at no cost or obligation. It is sensible for both sides to work on this basis, together you can decide if there is a deal on the table that has legs and if so you can decide whether you want to appoint an advisor at all and also if it will be the advisor who did the first meeting for you.
If you follow these initial steps then you will be able to avoid wasting your time with a time wasting approach and within a short timescale of between a day and a couple of weeks have an idea of whether there is a deal which is worth putting more time into.
The next question you have to answer is whether it is worth, given that you have one credible buyer, it is worth opening the process to more. For the answer to this see my next blog:
Selling my business – I have one offer for my business, should I test the market