A BUSINESS ADVISER’S TIPS TO PROTECT OWNERS Business' VALUE
As detailed in Does your Exit Plan consider acquisition by a competitor or staff, while it’s exciting to get a call out-of-the-blue, it’s also easy to get ahead of yourself by thinking I might be out of here soon! And as exciting as the prospect may sound, it's important to consider the downsides to getting over-excited.
I’ve seen it before, business owners;
- Overshare sensitive business information,
- Waste a whole of time and energy with a so-called buyer who turns out to be a tyre kicker, or just someone researching your industry.
It can be soul destroying if you’re anticipating the best from the outset.
The key to working out if a potential buyer is legitimate, and with this I mean before you even contemplate signing an NDA, let alone share any business information, is to consider and question;
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Who exactly you are dealing with?
By this, is the person you’re directly speaking with the potential buyer or do they represent a company or some investors. What do they/the company do? What are their contact details? - Why exactly they are interested in your business?
Why did they approach you now? What’s the intent of their timing? - How they will fund the acquisition?
Note that owners being asked to provide some of the financing, especially for the EtA buyers, will become more common placed. You shouldn’t dismiss Vendor Financing out-of-hand, but it’s another aspect of a potential deal that needs sound advice. - What is their process for evaluating your business?
Have they made other acquisitions, and when and where? - What is their timeline?
When are they wanting to make a decision from enquiry stage to a final decision (Indicative Offer)?
There are many other questions to consider and you should definitely use your business owner ‘instincts’ to dig below the surface. And, unless you (and your specialist advisor) are confident that they are a legitimate potential buyer, don’t waste your time or energy.
If you plan to continue the discussions, the next stages should all be all about moving efficiently towards a detailed understanding of the proposed commercial terms on offer from the potential buyer.
Tip #1 – Structure all discussions to move both parties closer to ultimately signing a Letter of Intent (LOI) or Non Binding Indicative Offer (NBIO).
There is a lot of work to be done between the first call and an offer for your business. To avoid a potentially good deal falling over, which happens a lot, you need a structured process for both parties to follow with defined timings and milestones at key stages. The outcome of a well-run process should be an LOI or NBIO that encapsulates the key deal terms sufficient for you to make an informed decision on the potential deal.
If you don’t use an LOI or NBIO both parties can end up with vastly different interpretations of what they “thought” or “understood” they key deal terms to be based on a sea of emails, meetings and months’ old phone calls.
Don’t consider this step too formal. If either party pulls out before you get close to an LOI or NBIO (which can be seen a long way off at the start) that’s perfectly OK, and saves both time and money.
WHAT SHOULD BE IN A NON BINDING INDICATIVE OFFER (NBIO) OR INDICATIVE OFFER (IO) & WHEN TO USE THEM?
A well written NBIO or LOI (from an experienced adviser) is a simple but powerful way to summarise what the parties have agreed to date, and what is still outstanding or yet to be agreed.
While there are excellent templates to get you started, an NBIO or LOI will need to be negotiated and refined as the deal discussions progress. And that’s a big part of their usefulness – ensuring there is a written record of what both parties have discussed and agreed (or not).
An example of some of the more important details to be included in a NBIO/LOI:
- What is the (proposed) financial offer and how is it structured?
- How is the offer to be financed?
- What does due diligence cover? And how long will it take?
- What information is to be shared and in what form? For example, at what stage do you use detailed and/or identifying information?
- What are the reasonable timeframes for each of the key stages?
- Which people are to be involved?
- Are there any deal conditions? For example, finance.
NBIOs and LOIs are much underused in small business transactions. They don’t guarantee an offer will be made, nor the price or any other deal terms, but it increases the chances that you’ll only invest time and money with the most likely buyer of your business.
Don’t fall for the trap of thinking that these more formal written documents are ‘over the top’ or just for big business. They are actually a highly effective and organised way to sort the ‘wheat from the chaff’ and keep the sale process, which is usually drawn-out and often emotional, on track.
If you are in any doubt, think of it this way.
If you can’t get commitment to using and negotiating a basic NBIO or LOI with the potential buyer, then what are your prospects for actually completing the sale, and possibly working with them to help transition the business after the sale?
Tip #2 - Create a two-way conversation.
Be bold! This is your business, and your time.
Don't be afraid to ask the potential buyer any questions in the early stages of your discussions:
- Why are they interested in your business?
- What is their industry and/or business experience?
- What other business have they bought and how?
- What is their timeframe?
These are fair questions to ask, even when the potential acquirer made the first approach.
Clarity is important because the better you understand their reasons (i.e. what problem of theirs you are solving) the better chance of extracting the most amount of value from them.
For genuine buyers it reinforces that you are not ‘easy pickings’, and that they are dealing with an organised, well-prepared seller.
In some cases, asking these questions will be appreciated by the potential buyer as it will help to quickly and efficiently work out if this is a deal of mutual advantage.
And if the deal does end up going all the way, then you (as seller) will more likely do the deal on your terms.
If any of these questions get a potential buyer offside, that’s ok. They are probably looking for an unacceptable investment or just not that committed.
Don’t worry about it. You’ll have reducef your time spent on tyre-kickers so it’s a positive outcome.
If you’d like some other tips around the increasing likelihood of receiving one of these calls from a buyer, read our Part 1, Does your Exit Plan consider acquisition by a competitor or staff.