Selling Your Business: Why One-on-One Conversations with a Prospective Buyer Can Potentially Be Harmful
As a business owner, you likely receive unsolicited, or altogether random, calls and emails from potential investors and buyers looking to get a few minutes of your time. The caller seems nice enough. They pay you a compliment and mention they are looking for a business “just like yours.” If you’re not interested in selling, the conversation may end there. But for owners who may one day sell their business, this outreach is a good reminder to start planning for the day you do take that call.
As the M&A markets heat up, many owners will quickly find themselves holding a letter of intent (LOI) and be left thinking, “what do I do now?” If you’re like most business owners, selling your company is a once-in-a-lifetime event—one you spend many years toiling toward. And with valuations running high, and the promise of rolling over equity for a chance to make even more money several years down the line, these offers may sound too good to pass up.
Remember, while this may be your first time selling a company, most buyers have years of experience buying companies, and will use that to their advantage to get the best deal for them.
Managing Potential Buyer Outreach
What do you do when a potential buyer reaches out to you? First, be nice. Appreciate that someone thinks highly enough of you and your business to approach you to buy what you have worked hard to build. You never know if the person on the other end of the call may be a future partner or lifeline in tough times. Even if you aren’t selling your business, you may need capital to grow or take some chips off the table one day. It’s always much easier working with someone with whom you have a good rapport.
Ignoring the inquiry is fine, but many business development professionals will keep reaching out, which may compound the annoyance. A simple response is fine; if you aren’t interested in any circumstance, inform the inquirer of your position and acknowledge and appreciate their inquiry. If you would potentially entertain a sale for the right price but are too busy, tell them that as well—“I would love to chat with you sometime, but now isn’t the right time. Give me a call in four months.”
Even if you are in an aggressive sales mode, and are looking to expedite the sale of your business, reply with caution and be somewhat guarded. Think of this like dating. Take it slow at first, and don’t start planning the wedding on the first date!
Assembling a Business Advisory Team
At this point, if you are interested in having further conversations, pause, and get your professional team in place. Ideally, you have your advisors in place already, but most owners have not planned for these conversations, and unsolicited inquiries can catch them off-guard. In many cases, this is by the inquirer’s design.
At a minimum, your team should be comprised of:
- an investment banker or M&A advisor to help you understand if a preliminary offer is fair or if your potential valuation could be higher if other buyers are considered;
- an attorney who specializes in mergers and acquisitions;
- a wealth advisor to help you plan for your life after a potential transaction and keep your nest egg safe after you harvest your prized asset, the business; and
- a tax accountant to help you structure your transaction and provide the investment banker and wealth advisor with valuable intelligence regarding tax liabilities and ideal structures associated with your deal.
Creating Competitive Tension
Once your team is in place, your investment banker or M&A advisor can help you think about the inquiry. Understanding the marketplace is crucial to negotiating the best deal on your behalf. The key is to create competitive tension in the market for your business. To use an old military catchphrase, “two is one, and one is none.” In the context of selling your business, having more groups party to the conversation is the most reliable way to keep prospective buyers honest, get better terms, and realize the highest value.
Understanding the Business Lifecycle with Aldrich
Whether you’re ready to sell your business to the highest bidder or positioning it for increased growth, Aldrich Advisors is here to help you manage the entire business life cycle. Our team of specialists is dedicated to answering your questions and creating an optimal exit strategy.
Key points to remember:
- Don’t get too deep with potential buyers who contact you regarding intriguing deals.
- Don’t try to go it alone on broad M&A processes—they are a lot of work, and involve many pitfalls, especially if you haven’t previously navigated numerous deals.
- Don’t sign an LOI until you get an M&A advisor or investment banker’s advice on valuation and other LOI attributes.
- Do reach out to your advisors ASAP if you are considering further conversations.
- Do respond—but keep it short and sweet
If you have questions about transitioning your business or learning more now, please contact your Aldrich Advisor.
Meet the Expert
Senior Business Advisor
Brian Andreosky, CEPA
Aldrich Capital Advisors LP
Brian Andreosky joined Aldrich in 2019 and is dedicated to helping business owners transition their companies. In this role, he provides exit planning services to help business owners find the right solution to transition and maximize the value of their business. Brian is a member of the Exit Planning Institute (EPI). Prior to joining Aldrich,... Read more Brian Andreosky, CEPA
- Closely-held business and owners
- Business succession planning
- Business planning and analysis
- M&A and capital raise transactions
- CEPA, Certified Exit Planning Advisor