By Nick Nichols, CPA, CVA & Andrew Dieffenbach, CPA, CVA, MBA
Out of the blue, you are presented with an offer for your company. You hadn’t considered selling your business, until now, and you feel that you’re faced with two options: welcome the prospective buyer’s offer or walk away.
Is it tempting because you think it’s “crazy high”, or are you insulted because you think it’s “crazy low”? What’s a business owner to do?
You don’t need to react instantly. It’s highly likely that your suitor has no idea what your business is really worth; it’s likely a fishing expedition to see how you respond.
Instead, you should begin by taking some time to figure out the details. Assuming the offer is legitimate – especially if it comes from a reputable source that is well-known within your industry – consider the potential transaction carefully at your own speed. This isn’t a “fire sale” where you need to salvage a dire situation. With assistance from your professional advisors, you can develop a plan for responding to the offer. And, if the deal doesn’t pan out, you can still learn and build experience with the selling process, which can only benefit you in the future.
Details will vary from business to business, and within different industries, but here are five key steps in a comprehensive game plan.
1. Do your due diligence. Learn everything you can about the prospective buyer. Is it a competitor who wants to gobble up your company, a private equity group trying to pay less than what the business is worth, or someone who merely wants to kick the tires on your operation? IMPORTANT: Be aware that you will be giving up some leverage if you only negotiate with one buyer, as opposed to opening it to widespread bidding.
2. Rally your team. Responding to an unsolicited offer can be nerve-racking, but at least you don’t have to go it alone. Rely on professional advisors to steer you in the right direction and handle all the technical nitty-gritty. Typically, the team will be comprised of the following members:
• CPA: This business and tax advisor can generally be a sounding board with lots of prior experience. The CPA can advise on the significant tax considerations and assist with the valuation of your company. And he or she often serves as the quarterback of the team and able to make recommendations for the other team members if they aren’t already on board
• Attorney: The attorney will also have a strong presence. If a proposed deal goes forward there will be many issues to be addressed to protect your interests along the way (including if the deal doesn’t happen!). It’s best to use an attorney specializing in mergers and acquisitions. Working in concert with the other team members, a skilled attorney makes the process go more quickly and smoothly.
• Investment banker or business broker: This person or business should be experienced with your industry, skilled at identifying the universe of prospective buyers, knowledgeable about deal structure, and capable of working with your CPA to take steps to help maximize the value of your business. An investment banker may be able to assist a buyer with financing the deal. A skilled broker can add significant value to the transaction.
• Financial planner: The planner will play an important role post-closing, including a focus on related matters such as wealth management and succession planning. This person should also be involved prior to the closing to be aware of the circumstances and have an initial plan in place for receiving funds and working with the CPA to plan for tax payments and other financial matters.
3. Have a professional valuation done. Every business is unique; this is not a time to take short cuts! One of the mistakes most often made by sellers is underpricing or overpricing their business. Don’t assume you know what your business is worth. More often than not, a seller will overvalue their company due to the emotional ties and the time it took to create the business. That being said, you don’t want to sell too low either. The best approach is to have a valuation conducted by a valuation professional. We are Certified Valuation Analysts and can assist with this step. This is a good idea even if the offer is revoked, because it provides a picture of where you stand in the present, how much you may expect when you eventually sell the company and how much ground you need to cover to make up any difference. Your CPA/CVA can also advise on things that you can do to enhance the value of your business, and consult on tax planning opportunities for you and your family that should be considered well in advance of considering an offer or discussing a Letter of Intent with a prospective buyer.
4. Assess the risks: A risk assessment is usually conducted in conjunction with a business valuation. It focuses on the driving forces behind the value of the company and the possible obstacles in the way. This includes risks associated with your business, other risks associated with your industry or marketplace, and broader economic risks. Understand how these risks can be managed and expected to change over time. In short, is this the best time to sell? By taking this step, you can determine if it makes financial sense to go ahead with the deal and move it one step closer to fruition. If a deal proposal sounds too good to be true; it probably is! Those deals often fall apart.
5. Keep running on all cylinders. Last, but certainly not least, remember that