Every business owner is battered by letters asking about the sale of their business. You learn to ignore them or simply not put too much stock in them. But the phone call is different – the call from the big guys in the industry. They tell you they’re gearing up to make acquisitions and you’re the first on their list.
Not many things are more overwhelming or intimidating than that conversation. Whether you’re ready to sell or not, there is a rush of emotions: fear, excitement, trepidation, pride. Every fiber of your being wants this to work out for the survival of your business, for your employees, your family, your legacy.
For a real-world example, consider brightree, the largest provider of cloud-based software for the post-acute care industry. The company was looking to enhance their patient billing suite – which happened to be the focus of a Kansas-based company, Strategic AR. When the owner was approached by brightree with the opportunity to sell he knew he had this one chance to get it right. Because of brighttree’s size and scope, if they were to acquire a different business, Strategic AR would be at risk of losing an important chunk of customers to that provider. Selling was really the only way for the business to survive.
Even though it may not have been his ideal time to sell, Strategic AR’s owner saw the consequences of each potential outcome. He needed additional assistance to be sure the deal closed successfully. He called us at The DVS Group. We assisted with the negotiations of price and terms for the transaction. We recommended a local law firm that had both merger & acquisition and intellectual property experience to help with the documentation of the transaction. All parties worked together to obtain adequate cash at closing, an agreement for participation in future performance that provided risk controls, and attractive employment terms for the seller during a transition period. After a lot of hard work, the deal closed and the business survived.
The unsolicited offer for acquisition that Strategic AR received ended well. How? What are the best next steps when a strategic buyer offers to purchase your business? Here are four.
Check your expectations
How much do you think your business is worth? You have a number in your head. What is that number based on? How does that number compare to what the buyer is able and willing to pay?
Ultimately, the most important question – what is the buyer able and willing to pay?
They should give you an expected range if they are a real buyer. Strategic buyers will likely offer 6-8x EBITDA for small to mid-size businesses. But, because they don’t have a mandate to sell for a high multiple like financial buyers do, when they see something they really like they can afford a much higher limit on their multiple. We saw a deal close at 16x EBITDA and found out after closing that if the seller had a few other things in place the buyers would’ve offered 20x EBITDA.
Although they have some flexibility in the purchase price, strategic buyers have a pretty clear investment thesis and could get wary quickly once they see what’s under the hood. Additionally, if the strategic buyer is backed by private equity, they will be much more disciplined in maintaining a ceiling on their multiple. Knowing where the money is coming from will help you understand where the buyers valuation expectations stem from.
You don’t have a lot of time to go around vetting attorneys and accountants so you very quickly need to send up a flare to your friends who have done this before. Use their referrals to create a team of people that you like and trust. The owner of Strategic AR reached out to us and we used our network to put him in contact with the rest of the right people to make up his deal team. You’re doing this for the first time but this is what we do all day every day. We can walk you through the twists and turns you weren’t expecting but that we’ve seen many times before.
You also need to figure out some way to take a month or two to get this thing done without completely freaking out all your employees. It’s going to be really hard – especially if you don’t have a sophisticated team with you. At a minimum, bring an upper manager or two inside the tent who can pull all the financials together.
Call that dang insurance guy
Be sure you can get your hands on your insurance information – make that one of your first calls. They’re pricing risk and it matters that they do it right. Insurance can take longer than anybody thinks and a lot of people forget about it. Save yourself from a bad surprise and bring it up proactively with the buyer.
Just start a conversation
We have a unique vantage point on this topic because we assist sellers who receive unsolicited offers and we also represent buyers that make those unsolicited offers to business owners. Our goal with the letters we send to business owners is to simply start a conversation. Some buyers may pretend to know a lot about your business but they’re usually just making educated (and sometimes not so educated) guesses. Because your business is privately-held, we only know what your website and certain databases tell us. And that information is usually skewed.
A conversation is the perfect beginning of learning for both sides of the table. Hear them out. If they are sincere and willing to pay a reasonable price, it is okay to go through the exercise. If you are concerned about confidentiality, request a Non-Disclosure Agreement before the conversation. A real buyer will be willing to provide that protection. You’ll likely be surprised with the insights a conversation with a real buyer can provide.
Unsolicited doesn’t have to mean unprepared. Have a good idea of your valuation expectations. Seek out the right people. Think about roadblocks like insurance. And simply be willing to chat. Then you’ll be ready to handle the emotions that accompany the strategic buyer’s unsolicited offer to purchase your business.