If you’re like many entrepreneurs, your day to day life is consumed by how to monitor, operate, and grow your business. Finding the right employees, servicing customers, managing cash flow, building the brand etc. form part of a seemingly endless list of top priorities. Then, out of the blue, you’re approached by someone who asks if you’d consider selling the business.
Whether you’ve already developed an exit strategy, or it’s still languishing at the bottom of a long to-do list, responding to an unsolicited acquisition offer can be a formidable task. A number of business and market factors ultimately determine whether a deal is a good fit for a buyer and seller, and it’s usually about more than just getting the right price. While the answers are unique to each business owner, asking the right questions is a key to evaluating a potential opportunity. Below, we’ve highlighted some of the most common questions and things to consider, in our experience, when evaluating a potential deal:
Am I ready to sell?
Should you sell the assets or shares in your business? A buyer typically prefers to acquire the assets of its target, whereas a seller will prefer to sell their shares, due to the inherent benefits for the respective party. Understanding the tax consequence from both a seller’s and buyer’s perspective can prove to be a critical negotiation point, and serves as a first step toward finding a mutually acceptable reflection of these opposing benefits in the transaction price and structure. The seller’s unique ownership structure will also bear certain tax consequences and, while mid-negotiation may be too late to enact certain tax planning strategies, options may still exist to reduce the taxes payable and maximize transaction proceeds.
What can I expect?
From an initial offer through to completion, private company M&A transactions can take four to five months if everything goes well, and much longer if issues arise. Moreover, the diligence and negotiation process can put a great deal of strain on the relationship between a buyer and seller. The emotional attachment of an owner to a business he or she built always has potential to become a roadblock, and especially so when discussions become tense. Where a buyer and seller are entering into a strategic relationship for months or years to come, maintaining goodwill between the two sides is a key to transaction success.
How can I maximize value?
Managing a business provides daily distractions from the deal process, and the absence of someone driving the deal forward creates potential for a slowdown in data flow, analysis and discussions. A lack of momentum has real potential to kill a deal, and keeping things moving is critical.
Business performance throughout diligence and negotiations is critical to maintaining excitement and momentum for a deal. Too often, when deal execution steals the owners’ focus away from day-to-day operations, slipping business results wind up eroding transaction value or, worse yet, killing the deal.
A competitive, controlled process is used to maximize value, and ensure that buyers put their best foot forward. In the absence of such a process, it is possible for sellers to leave value on the table. The buyer that approached you may very well be a strong strategic fit, but a broader marketing process can be very informative in terms of both the price and unique opportunities that might exist with other partners.
What are common items to be mindful of?
Even smaller mid-market transactions have several moving parts and complexities to consider. The fair and appropriate treatment of working capital and cash, evaluation of transaction financing, deal structure, post-transaction integration, identification of non-operational or redundant assets, and the protocol surrounding sharing of commercially sensitive information are a few examples. A lack of transaction experience can lead to missing seemingly small details that may have a significant financial, legal, or operational impact on the viability or true success of a deal. To the contrary, identifying critical deal points early on can allow both parties to evaluate whether there is truly potential for a good deal at hand.
Unsolicited interest from a prospective buyer is often the source of great excitement for a business owner, and often it is also the source of new stressors and challenges. If properly managed, however, the opportunity could be very lucrative and open the door to an ideal growth partner, a transition plan, or the perfect exit. Navigating the myriad of key questions that surround a potential deal may be daunting, but it’s not something that you need to take on alone.
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