Many business owners are likely getting calls weekly from people looking to buy their business. Some of these owners have not done any sale preparation. So, in the event that an unsolicited offer comes in that is attractive, but the business has not been prepared for a process, there are some things owners can do immediately that could impact value.
Bethany Michel, managing director at the Harbour Group, says before owners do any prep, they should first make sure it's a good offer.
“I think a lot of people receive an offer — maybe they don't get called all the time, they haven't had any type of market check to know what's a reasonable price, what are reasonable multiples in their space. Maybe (the owner has) had a one-off conversation with a friend but they're in a totally different business and industry and you're using that as your guidance for what your value of your company's worth and that's just unfortunately not the way that it works. So even if it's not putting your business officially up for sale, it's reaching out to people you know in your space or advisers you might have to at least bounce the offer off of them to make sure that it's reasonable.”
She adds that owners with a sudden interest in selling aren’t likely going to be able to get everything they need for diligence together overnight. But they should be able, at a high level to talk about recent trends in their business, for instance, from a sales perspective, over the last few years. And given the circumstances of this past year, she says owners should be able to explain how it impacted their business.
“The high-level financial questions are going to be the obvious ones people will ask off the bat,” Michel says. “If you can have answers thought through on those, that's going to help a lot in just at least getting through the first part of the process.”
Sometimes during the diligence process, buyers can find a piece of information that kills a deal. Those could include signs that the company engages in unethical practices, has a lot of lawsuits, doesn’t pay taxes.
Michel says even issues that seem like deal killers can be negotiated, especially if the buyer really likes the fundamentals of the business — its operations, products and financials. However, there are exceptions.
“There are cases when you find out legal issues or environmental issues that are difficult to quantify because you just don't know what the outcome could be or might be,” Michel says. “And maybe it's far-fetched, but it's just not worth the risk and they're unwilling to indemnify it. That would be the type of thing that would be something you might potentially walk away because there's an unknown, potentially sizable financial risk to the business, which then you're taking on yourself.”
Michel, at the recent St. Louis Smart Business Dealmakers Conference, talked with Vic Richey, CEO of ESCO; Bo Butters, principal at CLA; and John Chalus, director – corporate advisory, at BMO Harris Bank; about deal preparedness. Hit play on the video above to catch the full panel discussion.