When opportunity knocks unexpectedly

ImageI often receive calls from business owners saying that a competitor, supplier, or customer has called and “wants to buy my business. What should I do?” As with many questions, it’s an easier one to ask than to answer.

First, if you are that business owner, ask yourself the following questions:
Are you really ready to sell?
What will you do when you do sell?
Does one of your children have an interest in operating the business?
Do you know what the business is worth?
Have you structured the ownership to minimize taxes?
Will the sale of your business provide you with the financial wherewithal to retire comfortably?

Presuming that you’ve considered the above points and are thinking that this offer might be right for you, there are several steps you must now take.

You need to put together a divestiture team comprised of a transaction lawyer, your accountant, a tax specialist, a business intermediary, and a wealth manager. Oftentimes other specialists, such as bankers, an industrial psychologist, technical support, insurance, actuaries, pension experts, real estate appraisers, and equipment appraisers augment that team.

Your intermediary must then evaluate the prospective purchaser according to the three M’s—money, management, and motivation.
Has the buyer the financial ability to complete the transaction?
Does the buyer possess the management skills to continue operating the business?
Are they passionate about the transaction, or are they just kicking tires—or worse, is this a guise for industrial espionage?

If the three M’s check out, you must then sign both a confidentiality agreement and a non–interference agreement with the prospective purchaser. Also, have your intermediary coordinate research on the buyer and his company, including reference checks and credit reports. Your intermediary must also determine how the buyer proposes to value your business ensuring that that formula delivers you fair value for your company.

Your third set of steps, once you have researched your buyer, is to provide information on your business to the buyer. Be careful not to provide too much too early. Your accountant can be of great assistance here. Have him or her prepare a summarized set of statements that can be used to build a profile from which the buyer can prepare a Letter of Intent.

Take as much time as you need to thoroughly understand all aspects of the Letter of Intent. Take nothing for granted and don’t assume anything. Always qualify and quantify. Do not allow access to any of your customers, suppliers, or employees until everything is formalized in the agreement of purchase and sale.

And speaking of agreements of purchase and sale, their legal terminology is quite complex and technical and they can easily exceed 100 pages. Your transaction lawyer should thoroughly review the documents with you.

Finally, it is extremely important to deal with the issues surrounding the sale of your business in a rational, logical manner. If you allow your emotions to get involved, this will become a dramatic and stressful situation. By taking the time to create a divestiture team and listening carefully to their advice and recommendations, most of the emotion will be removed from the transaction, and decisions will be much easier to make.

To summarize:

  • Qualify the inquiry. Is this a serious buyer or a tire kicker or corporate spy? Take time to research the buyer and check references.
  • Create a divestiture team…and take their advice.
  • Do not negotiate directly. Always use an intermediary, who then reports directly to you.
  • Never state a price. That sets a ceiling, and your offer will always be lower than your stated price.
  • Never provide information on your business…without your buyer first signing a confidentiality and non–interference agreement. Even then, provide only limited information.
  • Take as much time as reasonable to make your decisions. Don’t allow the buyer to set the timetable.
  • Never swap shares. (Yours for his.) Cash is better!
  • Do not make the transaction conditional on employees.
  • When unexpected opportunity knocks at your door, now you know what to do—be prepared!

Copyright Robbinex Inc. All rights reserved. D.M. (Doug) Robbins, President and Founder
Robbinex Inc.
1.888.ROBBINEX or doug@robbinex.com