Over the past few months as the M&A market has returned to life, we have seen aggressive buyers contacting business owners offering to buy their businesses. In fact, many of our current clients and engagements have resulted from business owners being contacted directly by buyers. What should you do if you get a call or letter from someone claiming to be interested in buying your business?

First of all, you should not offer to meet or talk to the buyer or their representative until you have time to educate yourself on your value and your options. During your initial conversation, a experienced buyer will be able to gauge your sophistication, desire to continue running the business, and gain important information regarding your company's value based upon your answers and reactions during the conversation. Therefore, the first decision you need to make is whether you will take a crash-course in M&A so you don't make a fatal slip and instantly lower your company's value or whether you will engage the assistance of an M&A professional. This is only one of three crucial decisions you will make in the actual sale process:

1. Decide whether or not to use an M&A Professional. In choosing the right M&A professional you should generally choose an M&A advisor instead of a business broker (unless you own a laundromat, restauarant, retail store or franchise location). You can expect to pay a retainer or monthly fee in addition to a success-based fee. If the M&A advisor will only be working with the buyer that you have brought to the table, negotiate a lower fee structure, given that the M&A advisor will not need to run the marketing component of the deal. If you are a scalable business with revenues over $3 million, resist the temptation to use a business broker.  More likely than not, they won’t be able to give your company the exposure it needs to obtain a quality buyer.  In an interview with various private equity groups and corporate buyers, it was found that most buyers increase their offers for companies on the average by 10% based solely on the fact that the target seller is being represented by an M&A firm. It would be optimal to get an M&A advisor involved even before the initial conversation with the buyer because you will probably make the whole process much easier for everyone, but you should still consider contacting an advisor at any time you feel you need help.
   
   
2. Build your Accounting and Legal Team Early On, But Realize Who has Responsibility for What. Whether you decide to proceed with the interested buyer on your own or use an M&A firm, it is important to ensure you are being represented by competent, experienced, and cost-sensitive attorneys and accountants.  It is important to realize that accountants and attorneys are essential to the deal, but do not take the place of an M&A advisor. An experienced M&A advisor will generally help to finalize the deal because of their experience in seeing deals through and putting the pieces back together when issues arise in due diligence. In addition, an M&A advisor gets involved in negotiating the letter of intent based on your personal and business needs. Accountants and attorneys are crucial in completing due diligence and negotiating the final purchase agreement.  Experienced M&A advisors have worked with quite a few attorneys and accountants and know which professionals may be good for your deal team.
   
   
3. Determine Whether You Intend to Pursue This Buyer or Shop Around. If negotiations with the interested buyer aren't providing you with the price or terms that you need or feel your company is worth, it may be time to find other buyers. Typically, buyers will offer a lower amount than what they feel your company is worth, but a strong negotiation posture and the ability to explain and justify your most valuable features can usually increase the purchase price. When even that doesn't work, you can use the interest from the current possible buyer to leverage offers from others by setting up competition. To shop the offer, you will want to develop some sort of confidential memorandum and start contacting VP's of Corporate Strategy at strategic buyers and executives at private equity groups. It would be advisable to have an M&A advisor or other third party contact these people so that the people you are contacting is not aware of the identity of your company. However, you must be careful to make sure that any third party or M&A Advisor you engage to contact potential buyers is licensed by FINRA to avoid the severe liabilities and penalties in the future. Typically, our experience has demonstrated that most companies are able to increase their selling price by an average of 25% when shopping around an existing offer.

Tips to Keep In Mind During Negotiation

The initial conversations with the initial interested buyer are probably the most defining points in the sale price of your company. Regardless of whether you decided to engage a professional or negotiate yourself, keep the following tips in mind in your negotiations:

1. Spend a lot of time gathering and understanding enough information to be confident about valuations in your industry and businesses in a similar size range as your business.  Also, really understand how motivated you and your family are to exit, but don’t discuss this with anyone else at your company.  When dealing with an experienced buyer that has bought many companies, it is important that you understand your company’s value.  Finally, it is crucial to have a tried and tested negotiation strategy in place to proactively provide the buyer with your company's value features and counter their arguments for negative features of your company. The buyer will be analyzing your actions and words carefully, and it is important to stay alert but not scare off the buyer by being too defensive.  Since they buyer is already interested in your company, you should be confident about your position but listen very carefully to what they are suggesting. 
   
   
2. Be very careful about suggesting a price and attempt to ensure the buyer makes an offer first. It is very difficult to move buyers up from an initial price, so if you suggest a price that you would accept, it will be practically impossible to go up from that point.
   
   
3. Be aware that, on average, the first offer given in an unsolicitied offer is 60% of the final sale price of the company. Most buyers offer a low price because they think the business owner might accept and count on the fact that buyers have not analyzed the true value of the company, have no idea of other comparable sales that have ocurred in their industry, and have not researched other options or sought other buyers.  For instance, they may offer you $20 million when your company is really worth $40 million to them, and if you don’t know how best to value your company, $20 million may seem like a fair value to you. However, knowing the criteria of those valuations and your own company’s situation will really help you become comfortable and suave in your negotiations and conversations.  Valuations can be a little confusing and the value can depend on what the buyer is interested in: cashflow, IP, talent, product offering, etc. Feel free to contact us if you need help understanding valuations.
   

At any point if you feel overwhelmed in the process, feel you may have taken a wrong turn, or you understand the real value we do provide, contact us. Orion Capital Group is an M&A advisory firm that specializes in advising clients and finding buyers for companies valued between $3 and $50 million and we are constantly in touch with buyers looking for investments in various industries.  Numerous times we have come across companies that were acquired without having gone through a competitive bidding process because it was convenient for the shareholders or because they were unaware they had other options.  Ultimately, many were taken advantage of by the buyer due to low valuations or below-market terms.  If a company offers to acquire you, call us and we can inform you of your options and guide you in your decision making process at no cost.  Even if you are just looking to find names of good accountants or attorneys, we know many professionals who can assist with other aspects of the deal process.