What to do if you're approached about selling your business: A founder's guide

"What should I do if I'm approached about selling my business?" 

Business founders can often be approached by a company expressing interest in their firm, raising the question, what is the value of my organisation now, and what is its potential?

Whether it's a formal offer, a preliminary inquiry, or even interest from a competitor, such approaches demand a nuanced, well-informed response. 

This guide is tailored to help you navigate these initial contacts thoughtfully and strategically, ensuring you're well-prepared for potential discussions about evaluating and possibly selling your business.

The preliminary decision: engage or don’t engage?

Before delving into negotiations or detailed discussions about selling your business, the first step is deciding whether to engage. 

This decision hinges on several key considerations:

• Shareholder Consensus: Is there unanimous agreement among your shareholders on the prospect of selling
• Strategic Alternatives: Have you thoroughly explored all strategic avenues open to your business, apart from selling it?
• Valuing Your Business: A clear understanding of your business's intrinsic and market value is essential for informed decision-making.

Decipher the buyer’s approach

Careful analysis is needed when initially approached, to understand the intentions and capabilities of the prospective buyer. It’s crucial to differentiate between seasoned acquirers and newcomers to the acquisition scene, as their history and financial stability can greatly impact the potential deal's nature and success.

We recommend that sellers thoroughly investigate the genuineness of the approach. This involves scrutinising who is making the approach, their level of authority, and the specifics of their acquisition strategy.

• Is their interest in your company part of a broad market scan, or are they seeking a particular asset that your firm uniquely offers?

Understanding the rationale behind their approach, the number of other potential targets under consideration, and the volume of deals they intend to execute in your sector is paramount.

Furthermore, it's not uncommon for initial approaches to be made by a third party, such as a buy-side M&A firm acting on behalf of the ultimate buyer or investor.

• In these instances, it’s a priority to ascertain their mandate: Do they truly possess the authority and directive to initiate a deal, or is their activity more exploratory?

Delving into these details can help distinguish actionable interest from mere tyre-kicking activities, ensuring your engagement in discussions is both strategic and informed.

Identify how you'd fit into the buyer's strategy

For Strategic Buyers: These entities are typically in search of businesses that complement their current operations, seeking to create value through synergies, typically through expanding market reach or enhancing service offerings. Understanding the strategic buyer's long-term objectives can illuminate how your business fits into their broader vision, enabling you to highlight the unique aspects of your company that are most aligned with their strategic goals.

For Financial Buyers: Financial buyers, such as private equity firms, are primarily focused on the growth potential and profitability of your business. They evaluate how well your company can scale, its position in the industry, and the potential return on investment it offers. In this context, fitting into their strategy might involve demonstrating how your business stands as a high-potential investment within their portfolio, possibly benefiting from synergies with other portfolio companies.

Recognising and articulating how your business aligns with the buyer's strategic ambitions or investment strategy allows for more targeted and effective negotiations, positioning your company as an indispensable asset to the buyer's future plans.

Navigate the competitive consequences of selling your business

Engaging with potential buyers, especially those who might be competitors, inherently entails risk. Sharing sensitive information such as client details, employee data, strategic plans, and financial records prematurely can expose your business to significant vulnerabilities, especially if the deal does not progress. This caution extends beyond competitive scenarios to all types of buyers and investors, underscoring the importance of strategic information sharing.

A critical aspect of this strategic approach involves the timing and preparation of financial information sharing. Financial statements are pivotal in valuation discussions; therefore, presenting these documents requires meticulous preparation and analysis to showcase your company's performance accurately and advantageously. 

A financial buyer, for instance, will expect a detailed three-year forecast grounded in realistic assumptions and drivers, not merely optimistic projections of continuous growth. Similarly, how your business pipeline is represented and the overall positioning of your business is critical. These elements should convincingly demonstrate the company's growth potential and strategic value to the buyer, helping to avoid any revaluation or renegotiation triggered by 'new' discoveries about the business's financial health or prospects.

In essence, careful preparation and the strategic timing of sharing detailed financial and strategic information can significantly impact the valuation, the perception of the business's worth, and the likelihood of a successful deal. 

Tip: Navigate exclusivity agreements with caution

A common tactic in unsolicited approaches is the buyer's push for exclusivity agreements early in the negotiation process. 

Such agreements prevent you from discussing or negotiating with any other potential buyers, ostensibly locking you into a singular path that may not be in your best interest. While it may be presented by the buyer as a sign of commitment, requiring them to allocate substantial resources towards the acquisition, this strategy can often weaken your negotiating position.

Agreeing to exclusivity too soon can significantly limit your options and leverage. Buyers may argue that exclusivity is a testament to your seriousness about the deal, using emotional appeals to pressure less experienced sellers into compliance. However, remember that maintaining the ability to engage with multiple potential buyers can enhance your negotiating power and potentially the valuation of your business.

Before considering any exclusivity arrangement, seek professional advice

An experienced M&A advisor can help you understand the implications of exclusivity and strategise the best timing for such commitments, ensuring you retain control over the negotiation process. Pushing back on premature exclusivity demands allows you to explore all available options, keeping the negotiations competitive and in your favour.

Control the exchange of information

It's fundamental to control this process, ensuring that all shared data, especially financials, is optimally prepared to reflect the true value of your company, safeguarding against the risks of premature disclosure.

Imagine a scenario where, after gaining insights into the inner workings of your company, the interested party decides to pursue a different acquisition, armed with knowledge about your operations. 

It underscores the benefits of securing a Non-Disclosure Agreement (NDA) before any substantial exchange of information. 

An effective NDA protects your business's confidential data and guards against potential staff poaching, ensuring that your engagement with potential buyers does not inadvertently compromise your competitive edge.

Engage an M&A advisor early when selling your business

When you identify that the buyer's interest in your business is sincere and warrants further dialogue, it's imperative to bring an M&A advisor on board early in the process. 

Selecting an advisor goes beyond finding a guide; it's about ensuring they possess both a global reach and deep sector expertise, akin to what we offer at Equiteq. 

An adept advisor can:
Deliver Invaluable Insights: They provide a deep dive into the approach's legitimacy and how well it aligns with your strategic goals, leveraging their sector-specific knowledge to assess the potential buyer's intentions accurately.

Strategise Effectively: With a comprehensive understanding of your industry, an advisor can propose alternative strategies, highlight pitfalls such as tax implications and deal structuring, and navigate these with finesse.

Facilitate Direct Conversations: Having established relationships with numerous potential buyers and investors, a specialised advisor often knows the party showing interest in your company. This familiarity allows for open, candid discussions about the buyer's seriousness, potentially accelerating negotiations toward an optimal valuation and deal structure.

Expand Your Horizons: The right advisor brings to the table not just local insights but global access, crucial for identifying the best possible deal, potentially with a buyer from another country or region. 

For instance, at Equiteq, our experience in bridging businesses across continents—from APAC and Europe to North America and beyond—enables our clients to explore a wider array of opportunities, ensuring a match that promises strategic long-term growth.

Early engagement with professional advisors, especially those equipped with both global outreach and sector-specific acumen, equips you with the necessary wisdom, readiness, and strategic savvy to confront these discussions effectively. 

• Determining the optimal timing for sale
• Executing a sales process that minimises exposure to risks
• Formulating a strategy that meets shareholder objectives 

This understanding helps to position your business optimally in the market, making it attractive to potential acquirers and ensuring you navigate this journey with the clarity needed for a successful outcome.

We invite you to explore our Sell section for detailed insights on navigating these complex dynamics toward a successful sale. 

We aim to guide you in securing the highest valuation, identifying the most suitable buyer or investor, pinpointing the perfect timing, reducing risks, devising the right strategy, and negotiating optimal deal terms. Our expertise is dedicated to enhancing the overall package of your deal through strategic insight and negotiation prowess.

We're here to help you uncover the potential of your business and ensure you’re ready for present opportunities and poised for future opportunities. 

Visit us to embark on this pivotal journey with confidence, armed with the knowledge and support necessary to realise the full potential of your business venture.

This article was updated on 15th April 2024, and was based on an original blog post published in June 2022.