Have you ever received an offer from out of the blue to buy your business?
According to research conducted by the National Center for the Middle Market, it would not be surprising. Their study into M&A activity revealed that 45 percent of all sales are opportunistic, meaning they had come as a result of an unanticipated offer.
Of course, this doesn’t tell half the story, as this survey by NCMM only highlights the sales that began with unexpected offers. Countless other offers to buy a business in this active market will likely have been batted away by business owners with no interest in exiting.
This substantial proportion of M&A deals starting from opportunistic offers is unsurprising when you consider the strength of the current seller’s market. In recent years, buyers have been incredibly active in pursuing targets across all industries due to the general economic prosperity in the U.S., particularly within the middle market.
These conditions are ideal for sellers who have planned to exit their business. But, many buyers won’t wait for companies to be placed on the market – they’ll capitalize on these conditions to find businesses that match their goals.
Simply receiving an offer of this nature is likely to cause people to contemplate the future, for themselves, their family and their company. This is especially true when you consider a study by Barlow Research Associates earlier this year that revealed that 45 percent of middle market business owners or largest shareholders are 65 or older.
You’ve received an offer to buy your business – now what?
So, how should you react to an unexpected offer for your business? Well, Ryan Binkley and the team at Generational Equity believe these are the moments where business owners need to recognize how much (or, more likely, how little) they know about mergers and acquisitions.
If you’ve been contemplating an exit but haven’t set the wheels in motion yet, an offer out of the blue can seem like fate that this opportunity presented itself. But, this is a risky approach to take. Instead, if and when you receive an offer to buy your company, ask yourself a few questions:
- Do I have the knowledge and experience to sell my business for maximum value?
- Am I prepared to invest time away from my business to negotiate a sale?
- Have I built a buyer-ready company?
In Ryan Binkley’s experience, the answers for most business owners will be no, as they are unlikely to have been through the process of selling a business, let alone multiple times, have no idea how long a business sale takes, and are so tied to the company that it cannot operate without them.
So, if this offer does get you thinking about the future, take the following advice to heart:
- Speak to a professional M&A advisor to guide you through handling your offer and the process of exiting your business. The advisor can also help you determine if there are other active buyers in the market that would be interested in your company.
- Take steps to ensure your company is as buyer ready as possible
How an M&A advisory firm helps you
Not reaching out to an M&A advisory firm and heading into negotiations alone presents a number of potential problems:
- The offer you receive might seriously undervalue your business, meaning you leave money on the table when you exit
- With no other buyers in consideration, the buyer is under no pressure to improve their offer
- Professional buyers will be far more experienced and savvy in negotiations unless you have extensive experience in buying and selling business
- The buyer could take an unfair approach to its due diligence process, identifying ‘problems’ that cause them to reduce their offer
First and foremost, working with an experienced M&A advisory firm will determine whether the offer to buy your business is near your company’s enterprise value. One of the first steps Generational Equity takes to support its clients is to conduct a comprehensive evaluation of their company. This takes time, but it means you will be able to spot a low-ball offer if you receive one.
Next, an M&A firm will help market your company to a range of qualified buyers, and will host a limited auction to determine which presents the most compelling offer. This doesn’t solely relate to the price and deal structure, but also whether the culture of the buying and selling companies align – this can be a significant factor in whether a sale proves successful or not.
The support of experienced M&A advisors will also pay dividends in the negotiation stages. They will be familiar with the practical details and emotions that come to the forefront in any negotiation, and will be able to guide you through any unexpected turn of events. This familiarity with the process makes it far more likely the deal doesn’t grind to a halt, and that the final deal structure is suited to all parties, not just those buying the business.
This is just a brief summary of how an M&A advisory firm can guide you through the process of selling a business for maximum value, and not simply defer to an unsolicited offer by an unknown buyer. If you’d like to learn more, you can read Generational Equity’s selling a business services.
Building a buyer ready business
To wrap up this article, Ryan Binkley would like to share a few tips on how to create a buyer-ready business.
By approaching this early, you are in a much better position to attract and respond to offers for your business, whether these are unexpected or are received as part of a limited auction. Taking steps to build your company with a prospective buyer in mind helps enhance your value and reduces the risks associated with your company.
Plus, with nobody certain about how long active seller’s markets like this one will last, it means you can ensure your sale is concluded when the market is strong, and you don’t miss out on earning the maximum value.
Here are four immediate areas to focus on to improve the appeal of your company to those looking to buy a business, whenever their offer arrives:
- Bring your financials up-to-date – buyers will require you show them your last few years of financial documents, so it’s important to have them organized, current and easily available. If you don’t already, work toward implementing an accounting system that will help you stay organized and allow you to pull reports effortlessly. It’s also important that you work with an M&A advisor to recast your financial statements before accepting any offer.
- Reduce owner dependence – by surrounding yourself with a key management team that understands your company inside out and are actively working towards its growth, buyers are less likely to fear that business will go backwards when you are no longer at the helm.
- Avoid customer concentration – a big red flag for buyers is if too much of your revenue is tied into a single customer or client. If you lose them, would the business collapse? To reduce this risk, focus on diversifying your customer base so there are multiple revenue streams to rely on.
- Identify your intangible assets – these off-balance sheet assets set your business apart from all others, and leveraging these are crucial to exiting your company for the optimal value. As one buyer will value these assets more than another, this makes it important to not necessarily accept the first offer you receive.
Ryan Binkley hopes this has been a valuable insight into how to respond to unexpected offers to buy your business. Above all, it is important to recognize how much (or more likely how little) you know about the M&A process, and that by proceeding with an unsolicited offer from a single buyer you likely hand them all the aces.
By taking the time to increase the buyer-readiness of your business and receiving support from an experienced M&A advisory firm, you are far more likely to achieve the offer you deserve for the years you’ve spent growing your company.
If you’d like to read more from Ryan Binkley, visit his blog for a wide range of articles aimed at supporting business owners with their exit plans. You can also find and connect with Ryan Binkley on LinkedIn.