Receiving an offer for your business can be exciting and potentially life changing. But don’t get too carried away with the flattery and talk of sky-high numbers from your business suitor. An offer can be time consuming, distracting and value destroying if the potential buyer isn’t serious and chooses to walk away.
“It can take you away from focusing on the day job,” says Richard Murray, chief commercial officer at business growth advisors Elephants Child. “You spend all that time and then find out that the buyer was a competitor trying to have a look at your business or tyre-kickers casting their net out with no great intent. Either way by the time you properly re-focus on your business your valuation has been eroded as performance suffers. You have taken a step back just by looking at the opportunity.”
As such it is vital that you determine how serious your buyer is before you start giving up your time and opening the books. That can be difficult for entrepreneurs, most of whom have never sold a business before.
Henry Campbell-Jones, managing director of Hornblower Business Brokers, says the first step is to carry out desk-top research on a potential buyer as well as asking them direct questions. “Find out what their acquisition strategy is,” he says. “What attributes are they looking for in a business and why is your company of interest to them? What do they already know about your company, what is their strategic interest and how would they take it forward?”
Owners should also ask whether the buyer is looking at any other companies and what their track record of acquisitions has been. “Depending on how they respond you can build up a picture of whether the plan has been thought through and whether it is viable and rings true,” Henry adds.
You should also find out whether the buyer knows your market and whether they, or a colleague, have the necessary sector skills, expertise, licences, or qualifications.
Financing a purchase
It is also important to determine how the buyer intends to finance the purchase and what form of deal structure they have created. Is the buyer backed by private equity or loans, or will it be their own capital? Do they intend to put down any money at all? Some buyers look to structure deals in which the seller provides loans to facilitate the process.
“When it comes to funding, look them up at Companies House or a credit rating database where you can see their balance sheet assets for the last financial year,” Henry says. “Look particularly at their cash in bank and net current assets figures.”
Another key is gauging how ready and prepared the buyer is if you agree to more detailed discussions. Do they have professional support and a due-diligence checklist in place? Do they have a timetable for any deal?
Are you serious?
Henry, however, cautions owners not to be too suspicious.
“There are not many firms pretending to buy just to garner information,” he says. “If there are then they will probably be known in the industry already. I’d advise not to be too searching at the initial stage because the buyer might just disappear. For example, asking for the buyer’s financial statements and detailed deal structure would tend to come at the next stage, once you have had the initial high-level discussions to establish compatibility.”
Richard adds that owners must also carry out a ‘seriousness’ test on themselves. “Stop and think about your own personal circumstances,” he says. “Am I at a stage where I want to sell or indeed can afford to sell? Is this right for the business?”
Owners can carry out all these processes themselves but often securing professional advice from a broker can be helpful.
“It is very difficult as a business owner to get this right yourself,” says Richard. “You need the skillset of people who have been there and done it. Brokers can hold your hand and help you avoid pitfall after pitfall.”
If you’d like support as you work towards an exit, talk to your St. James’s Place Partner
The opinions expressed by third parties are their own and not necessarily shared by St. James’s Place Wealth Management.