If your company has successfully navigated the challenges of “startup” and “early stage development,” and if it has arrived at a place where it is relatively stable and has market recognition, you can expect would-be buyers to start sniffing around, trying to determine if you’re interested in selling. Some entrepreneurs will start and sell many companies over the course of their careers, but most do not. For most entrepreneurs, selling their company is a once-in-a-lifetime deal, so (assuming you are one of those once-in-a-lifetimers) when you get inquiries from would-be buyers, it’s critically important to respond to them appropriately, and to understand the do’s and don’ts in the M&A (Mergers and Acquisitions) world. For more on this, please continue reading below.
Psssst. Hey buddy! Wanna sell your company?
In the best of all worlds, you will have already thought about your goals for exiting your business. Do you want to sell it outright? Do you want your employees to buy it? Do you want to pass it along to your kids? And how much cash to you need to get out of it in order support the lifestyle you want after you have transitioned the company to someone else? If you have already done that thinking, when someone wants to talk about buying your business, you’ll know pretty quickly whether or not this particular buyer will match up well with your goals.
First, in most cases, the appropriate response to someone who indicates an interest in your business is no response at all. You can be polite and acknowledge the inquiry, but nothing more. If you have no intention of selling your company, say so and move on. There’s no reason to waste any time on something you have no intention of doing. However, if you’re curious and want to at least stick your toe in the water, here are the initial steps you should take:
1. Find a good M&A attorney. You don’t want your regular attorney who helps you with contracts and transactional stuff . . . you want a specialist who does M&A work all day, every day, and who has a bunch of successful deals under his or her belt. The more the better. Likewise, you’ll want an accountant who has M&A experience and can advise you on tax implications as a deal starts to take shape.
2. Discuss with your attorney whether or not you need to bring in the services of an investment banker or a business broker. Those advisers will want to steer you away from a single buyer and point you instead toward setting up an “auction” where multiple buyers will bid against one another for your business. For many smaller businesses, the deal will be too small to attract an investment banker, but an experienced M&A attorney should be able to recommend a qualified business broker if you decide that sort of help would be useful.
3. Ask your attorney for an NDA (Non-Disclosure Agreement) that you will then have signed by the would-be buyer. You’re not going to disclose anything yet, but it helps to have that document in hand before you say anything at all to your would-be buyer. An NDA is a fairly standard document that shouldn’t cost a lot for your attorney to prepare.
4. Learn as much as you can about the would-be buyer before you offer any information about yourself in return. Sometimes the initial contact may come through a “straw man” (a representative of the buyer like an attorney or accountant or business broker, but not the buyer himself). You want to get passed the straw man and find out who the real buyer is:
• a strategic buyer (someone in your industry or a related industry who sees your business complementing his)?
• an investor?
• a competitor?
• a tire-kicker (someone who likes to talk about an acquisition, but when push comes to shove, will never write the check)?
• a bottom-feeder (someone who is only interested in your company if you’ll sell it for pennies on the dollar)?
You also want to know the buyer’s goals for this acquisition. What is he or she trying to accomplish? And of course, you want some assurance that the buyer has the financial wherewithal to do the deal that would meet your goals.
OK, at this point, if the buyer has not been forthcoming with the information you’ve asked for, or if you do have the information you’ve asked for but you don’t like what it’s telling you, stop. Go no further. You’re done. On the other hand, if you’ve got the information about the buyer you wanted and are encouraged by it, then you have a decision to make. Do I start divulging the information the buyer will ask for and start negotiating in earnest, or do I walk away? This is an inflection point that many entrepreneurs simply can’t work through. It’s one thing to go through the intellectual exercise of formulating an exit plan, but it’s quite another to go through the emotional trauma of leaving something that you’ve spent years, maybe even a lifetime, building.
If you do decide to proceed down the path toward a sale, be guided by your attorney and/or business broker as to what information to divulge and when to divulge it. The buyer will be very interested in seeing your financial statements, but that may not be the first thing you want to show him.
All this assumes that your business is not under undue pressure, financial or otherwise, to sell and that if the negotiation takes a turn that is unfavorable to you, you can walk away and continue operating the business as you were. It’s vital that you maintain that position of strength right up until the last sale document has been signed. And don’t get so committed to getting the deal done that you allow seemingly innocent eleventh hour concessions to sneak in and undermine your position.
What we’ve described here are only the early steps toward selling your company, but it’s a big deal, so you want the best possible team . . . an attorney and an accountant, both with M&A experience, and possibly a business broker . . . to help you get it done. Such a team is not inexpensive, but if you want to maximize the value you can get for your business, this is not a place to skimp.