- Posted by Clear Rock
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As a business owner you may have experienced this phenomenon: you get a call or a letter or an email stating, essentially: “I want to buy your business.” This of course can be a mixed blessing. First off, the offer itself probably amounts to nothing. After all, anyone can make the offer. That doesn’t stop a percentage of business owners from running for the exit – which is exactly why these campaigns work for the buyer.
Let’s take a step back for a moment and look at how you might approach these situations. Here are three points that you should consider:
KNOW THE BUYER
Before getting very far into the deal, understand what the buyer is trying to accomplish, why they are trying, and their ability to actually do it. Question two main things:
- Their Plan. Are they looking for long term growth via acquisition? Do they intend to keep your company whole, or transfer over sales and terminate the majority of employees? Do they have a history of successful acquisitions? Can you talk to other owners they have acquired? How often do they alter their LOI terms during diligence?
- Financial Strength. How exactly are they going to fund this deal? Take a look at their balance sheet and earnings. (A good rule of thumb: transactions are more likely to work if the acquirer is at least 4x bigger than the seller). If they are proposing a deal that doesn’t include at least 50% cash at close then walk away early.
UNDERSTAND YOUR OWN VALUATION
How can you possibly comment as to whether the buyer is making a legitimate offer or not without having a solid understanding of your own value?
At a very minimum go out and pay a real, professional valuation firm to perform a valuation. Not the “$299 internet special,” but a real firm with credentialed valuation professionals. This is a great litmus test for your commitment to selling: a valuation will likely cost between $5,000 and $10,000 for a reputable firm.
That said, if you have a company valued in the range of $1m+, doesn’t it make sense to get this part right?
If you are serious about pursuing the offer, get your ducks in a row. Make sure your financials are clean. Make sure you properly present adjustments in the financials. Execute a “pre-diligence” before the potential buyer does.
Business owners may be skeptical of an unsolicited acquisition offer, but in some cases, such offers can provide great opportunities. The trouble with unsolicited offers is that anyone can make them. Enlisting the help of an M&A professional (not just to help with the above, but likely to seek additional competitive offers and drive up the price) is a great way to deal with the bid.