Responding to an approach

If you run a successful business, sooner or later the chances are that someone will approach you with an offer to buy your business.

When that happens, an awful lot will be going through your mind. Here are a few thoughts:

  • You were not thinking about selling, but this might be the opportunity to secure your retirement and your family’s future.
  • You don’t know if anyone else would be interested in buying your business and you have heard how difficult it is to find a buyer
  • Is the buyer serious, or just out to get hold of confidential information?
  • Will my staff find out?
  • Will my customers / suppliers / bank find out?
  • How much will they pay
  • What’s my business worth
  • Where can I get help?

It is most likely that any initial approach is just that – an initial approach, with very little detail. It will raise more questions than it answers!

It’s not an unreasonable parallel to think of this as if it were a romantic relationship.

Step 1, you’ve been asked “Would you like to go for a drink?”

You may know the company making the approach, but there’s always more to discover.

Respond by asking for a non-disclosure agreement (NDA) to protect your confidential information. They are usually mutual – in other words you also agree not to use the information you gather about them except to consider this opportunity. Look out for clauses that grant them exclusivity – in other words that you will not enter into discussions with anyone else – as it is far too soon to commit to that.

Find out about the person asking you out. You’d ask around & do your research first.

Research the company making the approach. Look at their website, use Companies House or a credit checking service to gain an idea of their financial health. Look for news stories where they are mentioned, especially if there are any stories about other businesses they have acquired.

If everyone tells you they are OK, you’d probably go on the date – but it would only be for a drink in a public place!

Meet the principal of the party making the approach. This should be on neutral territory, ideally where it is unlikely anyone who knows you and your business will observe you – so if you are in a small town, consider meeting in the nearest large city.

Your purpose is to get to know them, and to see if you like them and can get on with them. Ask them about their business, the vision, why they have made the approach. They will want to gather information from you, but at this stage you don’t tell them anything that is not already in the public domain – for example on your website on in your accounts.

It is perfectly OK to say “I’d rather not disclose that at this stage” during this conversation, but it’s a very poor idea to embellish the facts or attempt to mislead the potential buyer.

The acquisition process is very detailed so any attempt to distort the facts s will come out later – which would be very embarrassing. There’s a fine line between “telling the truth – well” and misleading, so if in doubt, say nothing.

You will create a good impression if you talk about how you started, your vision for the business and how proud you are of what you and your team have achieved….but don’t give the impression that you are bored, and it is time to retire or do something else!

Once you’ve had that first meeting, you will have formed an opinion of the potential buyers. You need to discover the answers to two key questions:

Do you like them?

If you don’t like them or at least feel able to tolerate them it is very unlikely that the approach will come to fruition. For the buyer to get to the point of making a formal offer they are going to need to spend considerable time with you and you will have to share information with them.

In your background research, and probably explicitly addressed in your conversation will be the question of financial resources.

Can they afford to buy you?

One rule of thumb is size; typically the sweet spot for a company making an acquisition is a multiple of between 3 and 10 times the target. If the target is bigger than 1/3 of the buyer, that’s probably too much of a mouthful not only in terms of value, but also to be able to successfully integrate the businesses. If it is less than 10% of the acquiring company it’s not going to make a real difference to them.

The big exception here is where the purpose of the acquisition is to acquire intellectual property – for example in technology or pharmaceutical – rather than the operational business.

You’ve just had a first date, so you are some way from jumping into bed!

It is far too early to talk about the value of the deal. You will want to know how much they will be prepared to offer, but they won’t be able to make a judgement until much later in the process, and if they do suggest a number at this point it will either be in such a wide range of values…..