Sale of a business - Come and knock on my door
You are going about your day to day when someone knocks on your door looking to buy your business. Initially you feel delighted and flattered. Assuming the buyer is serious, this may quickly turn to feeling overwhelmed.
When you get right down to it, all businesses are for sale. And if you have built something of value, a buyer may come with an offer that is hard to refuse.
Take for example, Harold, who has built a successful medical supply company which generates $3,000,000 in annual revenue. A buyer contacted him, took him for lunch and offered to buy his business. His business is demanding, and he sometimes feels stuck, but he hasn’t seriously considered selling. And while he is only 56 years old, he does think it would be nice to slow down and spend more time with his family and on his golf game.
Harold has spent decades building his business; however, he doesn’t have any experience selling a business. Although he is known to be a take charge confident guy - in this situation, he finds himself feeling confused and uncertain.
Lessons Harold learned along the way:
· Don’t let the buyer drive your strategy. When the buyer approaches you, they have come prepared. Sellers are busy growing and running their business and often haven’t had the time to spend on an exit strategy. This can create an imbalance in the conversation.
Before Harold proceeded, he stepped back to think about his long-term plans, reviewed the various exit methods and aligned them to his needs. He asked himself tough questions like; “Is the business part of my identity and how would I replace that?”
Harold concluded he would be open to selling 50 to 60% of his business and wants to stay on with less time commitment for at least 4 more years. At age 56, he isn’t prepared to fully sell. With a clearer exit strategy, Harold can continue conversations with the buyer with a greater sense of his own goals.
· Beware of tire kickers. A lunch discussion may be a buyer vetting opportunities because they aren’t serious. As a seller, you don’t want to waste too much time with a tire kicker.
Test them early to see if they are prepared to proceed.
Harold asked questions early like, “What is your strategy for running my business in the future?” and “What is your timeline to complete negotiations?” In this case, the buyer was quite serious, and Harold could feel comfortable continuing the discussions.
· Careful how much information you share. Because initial conversations are often casual in nature, we can accidently divulge too much information upfront. It’s important to have a non-disclosure agreement signed to commit to confidentiality.
It is in the buyer’s best interest to gain as much insight as possible before negotiations begin. It is critical that it is the seller who controls the release of that information until the buyer’s full intentions are known.
Even with small businesses, we recommend following a structured sale process. Structure brings needed discipline and the seriousness selling a business deserves. It also signals to the buyer that you are prepared and that this will not be a casual affair.
We encourage sellers to create an information package for a buyer(s) that gives an overview of the business, highlights the strengths and key competitive advantages. It also outlines the exit goals and expected next steps.
In Harold’s case, we helped him create the information package, which also requested a formal letter of intent from the buyer. Harold requested written confirmation of the buyer’s business strategy, price and term methodology, expectations of due diligence and the post deal plan. While a letter of intent is non-binding, it provides a framework for the deal and spells out the preliminary terms. With this document, Harold can get a much closer look if the buyer is the right fit.
· Root yourself in your priorities before negotiation. It can be easy to get caught up in the excitement of a deal and forget what is important to you. Go back to your strategy, look at your priorities and use this to make your decisions. Balance your feelings about the negotiation with the logic of your strategy.
At the top of Harold’s list was making sure his loyal employees landed well. And while this was more critical to him than the deal price, he forgot about this briefly when negotiating. Referring to his strategy was his lifeline to remember the most important elements of the deal.
Most business owners only sell a business once and therefore have one shot to monetize. Every day owners make mistakes when selling a business which costs them a lot of money in the process. While every owner has the ability to handle the sale of their business, do they know if they reached the best overall outcome?
If you aren’t feeling 100% confident in the selling process, please get advice from an experienced 3rd party who has no vested interest in whether the deal proceeds or not. Find someone who is fully in your corner regardless of the deal outcome.