If you are actively looking to sell your business there are three main ways in which you can inadvertently raise ‘red-flags’ and discourage potential buyers from proceeding with an approach.
If approached, it is likely that you are not the only business the acquirer is looking at. Most serious strategic buyers will often be looking at a number of merger and acquisition opportunities as well as other routes for business growth. Therefore, the potential buyer may not progress past the initial approach if they are not given confidence in the early conversations.
Moreover, the initial contact is often the most important, setting the tone of any future relationship between buyer and seller. So, it is vital that you send the right signals.
Prior to a Non-Disclosure Agreement (‘NDA’), there is good reason for caution in disclosing sensitive information regarding your business. Certainly, any details surrounding clients, customers, suppliers and staff members should only be disclosed once NDAs are in place. Once signed, any information shared should be protected by the NDA, including any details that you have requested from the buyer.
From this point, both parties need to provide sufficient information for the other to be able to take a considered view on the opportunity. For you, the vendor, it is important to know the future plans and strategy and to ensure that there is proof of funding available. The buyer, on the other hand, will be interested in assessing the overall feasibility and attractiveness of the opportunity. This will initially be based on financials and projections for future growth, alongside the capabilities of existing staff and procedures.
A lack of cooperation in sharing information, such as financial and management accounts, can frustrate the potential buyer and lead them to suspect that there is something to hide. It is also fair to say that most buyers are looking for well-managed businesses with thorough management reporting.
On top of this, a major stumbling block is a lack of accuracy in the information you provide. It can be tempting to be economical with the truth, but this is often a short-term win. You may end up with a good offer, but this may be retracted or revised when exposed during due diligence.
Furthermore, this raises concerns for the acquirer; will they be able to trust other information supplied and, more pertinently, establish a good working relationship post-acquisition?
Therefore, when it comes to sharing information, ensure that you are honest, accurate and concise. It is better for all parties concerned not to dedicate time to a project that ends up tailing off.
If you have engaged a sale adviser, be cautious in trusting the multiples and subsequent valuations proposed as realistic. Multiples of either EBITDA or Turnover are often vastly overstated, in an attempt to win your mandate.
Unrealistic valuation expectations are likely to discourage a potential acquirer from pursuing the opportunity further, meaning that you could miss out on a reputable buyer, who may be keen to offer a fair sum, on good terms, but at more industry and sector standard multiples.
If you have not listed your business for sale and are therefore ‘off-market’, but are interested in the approach, it is still important to be realistic with valuations. In particular, for considerations above £500,000, earn-outs or deferred payments are likely to be included in the deal structure. This is to protect the acquirer’s investment, but if you negotiate well, may also provide upside for you.
The final challenge is completion. It is too easy to think that if an offer is accepted then all will go smoothly. In our experience the average time from agreed Heads of Terms to Completion is approximately 2-3 months. We know of deals where this time has ended up being over a year.
Sometimes this is not the direct fault of the buyer or the seller. Often Legal and Accounting support can hold up the process either through delays in supplying information or by requesting a great level of detail. Finally, some buyers prefer to complete at the end of specific quarters or after yearly accounts are published, so this can also hinder completion.
So, for you, demanding a deadline, or giving impracticably short timelines in regards to when a deal can be finalised may frustrate the buyer. It can also cause concern as you may be perceived to be hurrying the process. The acquirer may be given the impression that the business has underlying issues that you, as the owner, is trying to detach from as soon as possible.
A patient approach is most likely to result in a successful sale, and one that is at the agreed valuation.
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