It can be both exciting and daunting when a potential buyer approaches you with an interest in your business. While it offers reassurance that others see value in what you have worked tirelessly to create, it can also be a pivotal moment for you, forcing you to reflect on your future and your long-term goals.

There are many reasons why a would-be buyer might be interested in acquiring your business. They may have identified you as a good strategic fit with their operations, see you as a way to enter a new market, or add a new product or service to their offering, or they may even want to remove competition.

What is clear is that once you’ve had an approach, understanding your options and the possible implications on you and your business is crucial in navigating this situation effectively, whether or not you decide to move ahead.

What should my first thoughts be?

An unsolicited approach might seem like a golden opportunity, but it also raises numerous questions on which you need to reflect. The first should be: ‘does their offer align with your personal goals?’, ‘are they legitimate?’ and ‘are they the right buyer?’.

Personal goals: It might be tempting to rush into a sales process if the buyer puts an attractive offer on the table. But first, take a step back and consider whether an exit is what you want. Also consider that selling a business is not a quick or straightforward process. There is a lot of work involved; it will be distracting. And there will be big financial consequences for you, your family, partners and employees. It’s worth pausing to decide what you want and to find out more about what a sale involves. Any serious buyer is unlikely to suddenly disappear if you ask for time to think.

Legitimacy of the approach: Not all offers are worth considering. Those presenting as ‘real’ buyers may just be testing the waters to gauge your openness to sale with no actual desire to buy right now. They may want to learn about the niche you operate in, or could even be looking at acquiring your competitor and want to see what you do in the same sector. The key point is that they may not be a legitimate buyer at all. With this in mind, the important things to consider are: 

  • whether the buyer has the financial resources available to complete the acquisition
  • whether they have experience in transaction execution. Have they made other acquisitions? 
  • who is ultimately behind the acquisition? 

Consider what their approach says about their intent and do some light research into the potential buyer to start to try to answer these questions. There is also the possibility that you know the buyer and that they are one of the key businesses in your sector. In this case, you may well want to meet them, even if you aren’t interested in selling today, to open up a connection for future discussions, but also to give you ideas of things you might improve in your business.

The right buyer: At this stage, you may also want to start to consider what this buyer will likely do to your business after they’ve bought it. Will they keep all your employees or will they merge it with another business? Does that matter to you? Are you happy with their potential plans for your business? These plans will become clearer as you proceed – if you proceed – but you should start thinking about the likely answers, now. 

Understanding the process

Once you are satisfied that there is serious intent and that the potential deal may well be aligned with your personal and business goals, there’s still a long way to go and lots of questions to answer, including many about the sale process itself:

  • How does the potential buyer value your business? 
  • What information do you need to give them? 
  • Are they the only interested buyer? 
  • Should you speak to other potential buyers? 
  • How should you value your business?
  • What does a sale process mean for day-to-day operations? 
  • What does the buyer expect of you, during and after the sale?

You will likely have many of your own, too. What usually becomes clear at this stage is that you need some sort of outside advice, even if you are a serial entrepreneur. 

In terms of seeking this advice, several different sources are available depending on the expertise required. A legal team can provide an explanation of the required documentation, while a competent accountant can offer an overview of the tax and financial reporting implications of a potential sale. However, your most prudent choice is to speak to an experienced corporate finance professional. They can provide comprehensive insights into all facets of a possible transaction, ensuring you have a clear understanding of all the variables involved and making sure that things move at an appropriate pace.

Time to take stock

While you are getting answers to your questions about the sale process, it is also a good opportunity to take stock of whether your business is ready for a sale. There are some important considerations here:

  • Confidentiality: Before you start engaging with a buyer, think about how you can protect your business from information being shared in the wrong way with the wrong people. You don’t want to give out sensitive information unnecessarily or have your employees hear about the possibility of selling your business through the grapevine. Depending on who it is and how serious you think they are, you may want to consider signing a confidentiality agreement. An adviser can also help you to understand what is a legitimate question that should be answered pre-offer versus something that can wait.
  • Valuation: Do you know how businesses in your sector are valued? You may have read or heard about others that have sold their businesses for large values, but valuing a business can be complicated. There are a number of value drivers that a buyer will look to score your business against. Understanding these and how your business will be rated is important. So too is knowing what buyers will perceive as the opportunities for increasing your business’s value.
  • Sale readiness: Selling your business is not a simple process. Once the buyer has provided an indicative valuation for your business, they will want to do due diligence, validating your company’s financial health and commercial strength, as well as undertaking operational and legal checks. This can take a number of months and include teams of accountants and lawyers. Your business will come under intense scrutiny during this time, so you need to assess whether your financials, operations, and governance are in good enough condition. Be prepared for documentation: the process will involve various agreements and schedules such as the Sale & Purchase Agreement (SPA), disclosure and warranty schedules, deed of taxation, non-competes and non-solicitation agreements, potential regulatory applications to name just a few. Understanding and preparing for these processes will help the deal process run as smoothly as possible. 
  • Legal and tax: There are a myriad of financial, legal, and tax implications you need to consider before entering a sales process. A transaction often involves large sums of money and a high level of liability if things move in unexpected directions, so it is crucial that you have competent advisers in your corner looking out for your best interests. This can help protect against common mistakes that have tax and cash implications for the business and individuals involved, such as promising shares to people but not documenting it correctly or having EMI schemes that are out of date. 
  • Your ongoing role: Most buyers will want the founder to remain in the business for a 1-2 year transitionary period to ensure the value of what they are buying is protected. To ensure this, some may offer a deal for your business that includes an immediate payment and a follow-on payment in one or two years based on your ongoing involvement in the company until the end of that period, (a deferred payment or an earn-out). Being clear with the buyer about what you want here is important. Deals fail when there is a lack of transparency about fundamental aspects such as your long-term role and vision.
  • Time, resources, and wellbeing: Running a successful business that receives interest from external parties is already enough of a challenge. Trying to continue operating the business as usual while running a process is close to impossible without the help of a corporate finance adviser supporting you every step of the way. A good adviser will allow you to focus on the business while running a well structured process that keeps you in control, leaving your mind at ease and providing you with the space you need to continue running your business.

Having the right corporate finance advisers takes away some of the strain of these considerations and reduces the exposure to opportunistic buyers who will gladly take advantage of inexperienced sellers when acquiring a business. It is important to make sure the advisers you are appointing have done many similar transactions before, ideally ones for businesses like yours, in your sector.

An experienced and skilled adviser can make sure that what you are being offered makes sense, whether you could do better, whether your business is ready for a sale, and identify common pitfalls before they arise, allowing you to stay focused on running your business.

Getting the best value for your business

As an entrepreneur, you will likely receive regular approaches by potential suitors with what seems like an attractive offer for your business. It is in the buyer’s interest to avoid a competitive sales process, as they may hope for an opportunity to acquire your business at a lower value by avoiding competition. However, by offering the opportunity to acquire your business to only one single buyer, you create an imbalance of power in the buyer’s favour. A key risk of engaging just one buyer is that, just as you become invested in the idea of achieving an exit, the buyer can unexpectedly pull-out or reduce their initial offer price, leaving you with limited alternatives. To maximise the value realised on the sale of a business, running a competitive process is often, but not always, the most effective solution. 

Even if you are interested in pursuing a sales process with only the party or parties who have approached you, if your business isn’t sale-ready, this can often lead to price chips, time wasted, and disappointment. A good corporate finance adviser can protect and add value to the offer currently on the table through a variety of means. 

How can Collingwood help?

Engaging an adviser early on protects the value that will be realised on the sale of your business. Even during preliminary discussions, Collingwood can help you and a potential buyer develop an understanding of the value that can be extracted from a sale. For example, during your first discussions we can support you to test the narrative surrounding value creation and strategic vision. This leads to greater clarity and confidence in multiple aspects of the transaction such as valuation, timing, process and positioning.

Selling your business is a complex and life-changing decision. As an entrepreneur, you’re used to navigating challenges, but selling your business is a unique event that requires getting it right the first time. We will ensure you maximise the value of your business, maintain consistent messaging, and achieve the best results in terms of price, payment structure, and overall outcome.

With decades of experience and over 150 transactions under our belt, Collingwood will help you achieve your exit goals and ensure a smooth transition into the next phase of your life, whatever you decide to do next.

If you are interested in learning more about how best to respond to a preemptive approach and navigate buyer discussions, complete the form on the right to download a copy of the “Off-market Approaches Playbook” and speak to one of the team.