This post is the second half of the full article, "I Got an Offer for My Business. What Do I Do Know?" You can read the first half the article here. We always welcome your comments.
Communicating to the Buyer
We, along with the owner's other advisors, are usually able to convince the owner to allow us to bring additional potential buyers to the situation to create a competitive bidding process. That being said, often the party who originally approached the owner is one of the most likely acquirers of the business. Therefore, you want to manage the communication with that party diplomatically. Usually, the conversation goes like this: "I very much appreciate the offer. I have not been planning on selling the business at this point in time, but your initiative made me consider my plans for the future. I need time to think about it further, and if I decide to move forward I will pursue it with you at that time." There is no need at this time for the business owners to indicate that they are soliciting other offers.
The buyer may accept this explanation and patiently wait for the next communication. On the other hand because they do want to secure that proprietary deal and may put pressure on the owner to move forward now. They may impose a time limit: "This offer is only good for two weeks,” or some other relatively short timeframe. They may not even provide an explanation as to why they are imposing a limit, or they may say that if the owner of this business is not interested in negotiating now they will go out and look for another target.
Generally, if a buyer is interested now they will be interested in three months. Furthermore, a threat – either veiled or open – is not a good sign for how either the negotiation will go or the quality of the post-transaction environment.
Starting the Bidding Process
The first step in starting the process is to engage an investment banker. There are many capable and qualified boutique firms operating throughout the country. The four most important considerations in selecting an investment bank are to make sure that the firm:
- is registered with the Financial Industry Regulatory Authority(FINRA);
- has as its primary focus M&A advisory work, rather than firms which treat that work as secondary;
- has a good reputation with advisors whom you trust: your attorney, commercial banker, accountant, or wealth management professional.
- has no record of multiple complaints or violations.
The investment banker will start off by estimating the market value of your firm. Owners may find that that value differs significantly from the preliminary offer they received from the first buyer. Second the investment banker will work to position your company, identifying the key investment rationale for both financial buyers, such as private equity firms, and for strategic buyers, i.e., operating companies already in the market or perhaps in adjacent markets. One of the most important steps is identifying weaknesses to address; in the same way that one fixes up a house and clears it of clutter before putting it on the market, you want to make sure that potential flaws are addressed prior to presenting your company to potential buyers. Identifying the scope and scale of these weaknesses should drive the owners’ decision to sell now or waiting until they can address the problems more fully.
Entering the Market
Assuming that the owners decide to sell now, the investment banker will prepare marketing materials for the company and identify a list of potential buyers. When it comes time to go to market, it is appropriate to make contact again with the first buyer. Often, the owner will make this second approach. It is helpful to indicate again, that the owner appreciates the offer. Then, say that the company has decided to move forward, but that because of the obligation the owners owe to their families, employees, and other shareholders, they have hired an investment banker to run a competitive process and get the best value for the company. In this communication it is also important to stress that this buyer may have an advantage because they are already positioned to move forward with the sales process.
Turning away a buyer who is ready to open its checkbook is difficult intellectually and emotionally. But ultimately, sellers usually come out significantly ahead when they run a competitive process. Even if a business owner is negotiating with a single buyer, the investment banker adds value by helping to structure and facilitate the deal.
About the Author
Mr. Rubin is a Managing Partner at the Westbury Group, a middle market investment bank located in Westport, Connecticut.
Over the course of his career, Mr. Rubin has worked as a strategy consultant for Fortune 100 companies, as an operating executive for firms ranging from startups to publicly traded companies, and as an investment banker for entrepreneurial middle market companies.