You got “The Call”.
Someone wants to buy your company!
You're flattered and excited. You might even be thinking about selling, and you want to hear what they have to say.
Negotiating with a potential acquirer before you’ve formulated your own sale strategy is risky and expensive. It rarely ends well for the seller. Here’s why:
Leverage The buyer is prepared and you’re not and, knowing they initiated the discussions, they take comfort in the fact that you’re probably not talking to anyone else. They can be patient in their negotiations and drag out the process in a way that puts pressure on your time and focus. Meanwhile, they are probably talking to other potential acquisitions, just waiting to see who represents the best deal for them.
Price The only way to know what your company is truly worth is to expose it to a market of potential acquirers. When you’re negotiating with just one potential buyer, valuation tends to focus on your historical financial metrics and “typical” valuation multiples as opposed how much they’re truly willing to pay. You can tell yourself that you’ll walk away from the deal if you don’t get your number, but that’s easier said than done once you’re engaged in a sale process.
Due Diligence Risk Strategic buyers have little incentive to actually close a deal in a reasonable period of time. Remember, they approached you so they’re pretty confident that you don’t have a well-considered sale strategy in place. When you’re following their lead, due diligence lasts longer and much of the integration planning happens on your dime. As the courtship gets drawn out, the buyer’s circumstances might change (management change, a bad financial report, etc.) or your circumstances might change, especially if the sale process is distracting you from growing your business. Even if you negotiated a great price up front, every flaw the would-be buyer uncovers in due diligence becomes a reason to adjust that price down before closing. Part of a winning sales strategy is rigorous, pre-sale due diligence preparation to make sure there are no surprises after a Letter of Intent is signed.
Tainting the Market If you engage with a buyer before you’re ready and the talks break down, as they often do, you may have permanently damaged a relationship with a company that could be your ideal buyer at some time in the future. By walking away from a deal or, worse yet, being rejected by the buyer, you’ve made a future deal less likely. It’s difficult to get a buyer to take a second look at a company; they assume that the business is somehow weaker or the owner is more desperate. They rarely offer better terms than they did the first time around. If word that your deal fell through spreads through your industry, it might be difficult to get other potential deal partners to the table.
A better approach:
If you own a successful business, people will call to explore an acquisition. Here’s the right approach to answering those calls:
Learn as much as you can about the potential acquirer while disclosing as little as possible about your company. Remember, they called you! What’s their strategy? What’s their timeframe? How does your company fit in with their plans? File that information away for future use.
If they really are a viable acquisition partner and you would consider selling now, tell them you’ll think about it, hang up and immediately begin building your transaction team. Don't sign an NDA or begin disclosing data until you have talked to your attorney and an experienced merger and acquisition advisor. This also might be a good time to check in with your financial advisor to see how a sale would impact your overall financial plan.
See our article on Selling Your Company - A Checklist for Business Owners.
When you have a realistic view of your company’s value, a plan for engaging with potential buyers and you’re well prepared for due diligence, then you can resume the conversation with confidence.
If you’re not ready to sell, take this opportunity to begin planning your exit, recognizing that you will exit your business someday - voluntarily or involuntarily. Having an exit plan means that you’ll have options for preserving the value of your company when the time comes.