Many successful business owners have had the experience of receiving an unsolicited phone call from someone offering to buy their business. On occasion, these unsolicited calls lead to a successful transaction, but more often than not the discussions go sideways for a wide variety of reasons. Here are some helpful guidelines for how to proceed when you’re on the receiving end of one of these phone calls.
First and foremost, verify the identity of the caller. Separating the contenders from the pretenders is your first challenge, and the person on the other end of the phone will generally fall into one of three broad categories:
- Industry leader looking for a strategically identified acquisition target. These instances are rare, but you would typically be very aware of their reputation in the industry.
- Broker who is working on behalf of a legitimate industry player. Some large companies will engage brokers to serve as their acquisition department, and these professionals will have a specific mandate coupled with a very methodical and professional approach.
- Broker who is simply attempting to find their next sale mandate. Unfortunately, the vast majority of these unsolicited calls end up in this category; however, this can sometimes turn into a unique opportunity under the right circumstances.
Tips for dealing with the industry insider or broker with a legitimate buyer
Before you divulge any information about your business or your interest in selling, find out as much as you can about what they’re trying to achieve. Some good questions would be:
- Exactly why have they identified you as a potential acquisition candidate? This will tell you a lot about how much they know about your business.
- What is their acquisition strategy? Some acquirers are simply looking for a business that can accelerate their growth in a specific geography, while others may be shopping for intellectual property or product lines.
- Do they need your management team and staff? Most business owners feel a strong sense of loyalty to their staff and want to ensure that their people will be well taken care of by the new owner.
- Would they likely want you to continue running the business for a transition period? Most of the time, a relatively short transition period works best for both parties.
- How do they typically value the businesses that they acquire? They may not be able to tell you exactly how much they would pay for your business right up front, but if you understand their valuation methodology you can apply that knowledge to your personal situation without ever divulging confidential financial information. If the price is right, you’ll almost certainly want to pursue this opportunity.
- Can they tell you anything about other companies they’ve acquired? What worked well and why?
- Are they looking at other potential acquisitions right now? This will give you a good indication of where you stand on their priority list. Serial acquirers will almost always have several deals in the queue at any given time, and if they have 2 or 3 ahead of you, it may take a while before senior management is able to devote serious time to you.
If you’re still feeling comfortable with the opportunity once you’ve fleshed out some of those basics, then request a Confidentiality or Non-Disclosure Agreement with the potential buyer prior to sharing any confidential information like financial statements, employee names, etc. You may also want to consider engaging with a professional advisor to assist you in these negotiations. Remember that the person you are talking to has likely spent many years of their career acquiring businesses, while this may be your first time going down this path. Make sure you’re not pursuing this opportunity from a position of weakness, and don’t be afraid to acknowledge your limited experience in this field.
Tips for dealing with the broker looking for a sale mandate
Before you divulge any information about your business or your interest in selling, find out as much as you can about this broker. If you are interested in engaging with a broker at the time they happen to call on you, some good questions would be:
- Where are they located? For most small to mid-market business sale mandates, a local professional advisor is best because they will have intimate knowledge of the local market and economic conditions. In addition, throughout the sale mandate several issues will come up that require immediate urgent attention, and it can be very difficult to handle those challenges from a distance.
- Have they sold similar companies in the past? A broker who has experience selling similar companies will have a better understanding of your industry and they’ll already be familiar with the best potential buyers, so their learning curve and preparation time should be much quicker.
- What process will they follow to sell your business? Obviously, confidentiality must be one of their primary considerations. But they will also need to prepare marketing materials, communicate directly with buyers, and spend a considerable amount of time working on your mandate. A scattershot approach rarely works well.
- Who will be involved in the sale process? Get to know the team of professionals who will be assigned to your file. It is most common for a junior associate to do most of the work under supervision from a more senior and experienced advisor.
- How much will they charge you for their services? Most brokers will charge an up-front fee as well as a success fee on closing. The success fee will usually be a percentage of the total transaction size. In addition, you may be able to get the up-front work fee credited toward the success fees on closing.
You may also want to consider interviewing another broker so that you have a basis for comparison. The first advisor you talk to might not necessarily be the best one, so make sure you conduct some due diligence on the professionals you engage with.
It’s important to recognize that this may be the largest and most important financial transaction of your life, so it’s critical to make sure you’re surrounded by a team of professionals who will cater to your best interests. These general guidelines can hopefully give you an added level of comfort for beginning these critical discussions.
This article is intended to be general in nature. It is important to consult with professional advisors when considering selling your business. If you find yourself in this situation, your BMO financial professional can refer you to the appropriate professionals.
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