Out of the blue, you are presented with an offer for your company. You hadn’t considered selling your business, until now, and you feel that you’re faced with two options: welcome the prospective buyer’s offer or walk away.
Is it tempting because you think it’s “crazy high”, or are you insulted because you think it’s “crazy low”? What’s a business owner to do?
You don’t need to react instantly. It’s highly likely that your suitor has no idea what your business is really worth; it’s likely a fishing expedition to see how you respond.
Instead, you should begin by taking some time to figure out the details. Assuming the offer is legitimate – especially if it comes from a reputable source that is well-known within your industry – consider the potential transaction carefully at your own speed. This isn’t a “fire sale” where you need to salvage a dire situation. With assistance from your professional advisors, you can develop a plan for responding to the offer. And, if the deal doesn’t pan out, you can still learn and build experience with the selling process, which can only benefit you in the future.
Details will vary from business to business, and within different industries, but here are five key steps in a comprehensive game plan.
1. Do your due diligence
Learn everything you can about the prospective buyer. Is it a competitor who wants to gobble up your company, a private equity group trying to pay less than what the business is worth, or someone who merely wants to kick the tires on your operation? IMPORTANT: Be aware that you will be giving up some leverage if you only negotiate with one buyer, as opposed to opening it to widespread bidding.
2. Rally your team
Responding to an unsolicited offer can be nerve-racking, but at least you don’t have to go it alone. Rely on professional advisors to steer you in the right direction and handle all the technical nitty-gritty. Typically, the team will be comprised of the following members:
This business and tax advisor can generally be a sounding board with lots of prior experience. The CPA can advise on the significant tax considerations and assist with the valuation of your company. And he or she often serves as the quarterback of the team and able to make recommendations for the other team members if they aren’t already on board
The attorney will also have a strong presence. If a proposed deal goes forward there will be many issues to be addressed to protect your interests along the way (including if the deal doesn’t happen!). It’s best to use an attorney specializing in mergers and acquisitions. Working in concert with the other team members, a skilled attorney makes the process go more quickly and smoothly.
An investment banker or business broker
This person or business should be experienced with your industry, skilled at identifying the universe of prospective buyers, knowledgeable about deal structure, and capable of working with your CPA to take steps to help maximize the value of your business. An investment banker may be able to assist a buyer with financing the deal. A skilled broker can add significant value to the transaction.
The planner will play an important role post-closing, including a focus on related matters such as wealth management and succession planning. This person should also be involved prior to the closing to be aware of the circumstances and have an initial plan in place for receiving funds and working with the CPA to plan for tax payments and other financial matters.
3. Have a professional valuation done
Every business is unique; this is not a time to take short cuts! One of the mistakes most often made by sellers is underpricing or overpricing their business. Don’t assume you know what your business is worth. More often than not, a seller will overvalue their company due to the emotional ties and the time it took to create the business. That being said, you don’t want to sell too low either. The best approach is to have a valuation conducted by a valuation professional. We are Certified Valuation Analysts and can assist with this step. This is a good idea even if the offer is revoked because it provides a picture of where you stand in the present, how much you may expect when you eventually sell the company and how much ground you need to cover to make up any difference. Your CPA/CVA can also advise on things that you can do to enhance the value of your business, and consult on tax planning opportunities for you and your family that should be considered well in advance of considering an offer or discussing a Letter of Intent with a prospective buyer.
4. Assess the risks
A risk assessment is usually conducted in conjunction with a business valuation. It focuses on the driving forces behind the value of the company and the possible obstacles in the way. This includes risks associated with your business, other risks associated with your industry or marketplace, and broader economic risks. Understand how these risks can be managed and expected to change over time. In short, is this the best time to sell? By taking this step, you can determine if it makes financial sense to go ahead with the deal and move it one step closer to fruition. If a deal proposal sounds too good to be true; it probably is! Those deals often fall apart.
5. Keep running on all cylinders
Last, but certainly not least, remember that you have to keep the company functioning at top capacity, even if you’re seriously entertaining an offer to sell it. Don’t be distracted and take your foot off the pedal. For one thing, the prospective buyer will try to renegotiate the price if the business starts to falter. For another, you run the risk of devaluing the business and damaging your reputation within the industry. Finally, you owe it to your loyal employees, customers, and clients to stay the course.
If you get an unsolicited offer to buy your business, it can’t hurt to listen, especially if a major player is in the mix. But this doesn’t mean you have to jump first and then ask questions later. Develop your plan as discussed above and stick to the guiding principles.
About the Authors
Wayne (Nick) Nichols is a Principal at ALL CPAs and directs and administers the business valuation segment of the firm. Nick has prepared business valuations for many companies in a variety of industries, including all forms of organizational structure. Beyond his business valuation services, Nick has a wealth of tax, accounting, planning and advisory experience that includes regularly assisting clients with business plan development, assisting emerging businesses and start-up companies, obtaining bank/venture financing, contract negotiation, litigation support, succession planning, and personal, financial and investment planning. His clients operate in many different sectors, including high technology, life sciences, publishing, wholesale distribution, manufacturing, health care, professional services and other fields of industry.
Andrew C. Dieffenbach, CPA, CVA, MBA is a director at ALL CPAs. In his role as a Certified Valuation Analyst, he works with business owners and their team of trusted business advisors to determine or resolve questions of value. In addition to his work as a CVA, Andy is also a CPA and provides tax services to all business entities, fiduciaries, nonprofit organizations and individuals. He works with clients across a broad range of industries, including retail, auto dealerships, real estate, technology, medical and professional services. He has particular expertise with complex partnership returns.