Article | December 21, 2023
by Horty & Horty, P.A.
An unexpected offer to buy your business can trigger a whirlwind of questions and emotions. Is this a golden opportunity or a potential pitfall? How do you even begin to evaluate the offer? Before you let excitement or apprehension steer the decision, it’s crucial to take a step back and approach the situation with a strategic, informed mindset.
It’s critical to avoid knee-jerk reactions. A snap decision can lead to regrets if it turns out to be misaligned with your deeper business aspirations or personal life goals. It’s also important to separate emotions from the decision-making process. Take a breath, step back, and consider the offer from all angles before proceeding.
Understanding the buyer’s perspective
When an offer to buy your business lands on your desk, one of the first steps is to consider what the buyer might see in your company. Are they looking at your robust customer base, proprietary technology, market position, talented team, or perhaps they’re eyeing a strategic acquisition to eliminate competition? Each of these factors can significantly influence the offer’s seriousness and its alignment with your goals.
Aligning the sale with your vision
Does the prospect of selling mesh with your personal and business objectives? For instance, if your goal was to grow your business into a family legacy, an immediate sale might contradict that long-term vision. On the contrary, if you were considering retirement or a career change, the timing could be serendipitous.
The importance of confidentiality
Confidentiality is paramount. Engaging in preliminary discussions without protection can lead to leaked business information and insecurity, potentially harming your business operations if the deal falls through. A non-disclosure agreement (NDA) should be executed promptly to ensure that any discussions or data shared remain confidential.
Evaluating the offer
If the buyer has approached you outside of a competitive bidding process, it’s considered a “proprietary deal.” While flattering, a proprietary deal might not yield the best value for your business since there is no other bidder to drive up the price. Likewise, without competition, the buyer may feel less pressure to present their best offer upfront. That being said, proper evaluation of the offer is not just an essential step but a multifaceted process that can determine the future of your enterprise.
To gauge the buyer’s genuine interest, seek a Letter of Intent (LOI) or an official purchase offer. An LOI typically outlines the preliminary terms of the purchase, including the offered price, structure, and other critical transaction details. It’s a more formal indication that the buyer is serious and is ready to negotiate in good faith.
While it’s tempting to delve deep into the details and possibilities that the offer presents, it’s wise to bring in your CPA and attorney early in the process. Before you become entangled in the potential complexities of a deal, have your CPA and attorney review the LOI and the proposed terms. This preliminary review can quickly highlight whether the offer is in the right ballpark or if it falls short of expectations. With professional insight, you can decide with confidence whether to proceed to the next phase of negotiations or reconsider your options.
Valuing your business
Before proceeding with any negotiations, it’s prudent to pause and take stock of what your business is truly worth. To do so, you’ll first need to ensure your financials are up-to-date and organized. This is a practice that should be a mainstay of your operational routine, but for many small business owners, it can be easy to let recordkeeping slide when you’re focused on the day-to-day.
With your financials in proper shape, you can move forward with a valuation. At this stage, it’s wise to collaborate with professionals who have the expertise to accurately interpret your financial data and contextualize the numbers within the broader market.
You may even consider going a step further by obtaining a Quality of Earnings (QoE) report. While QoEs aren’t required for a valuation, they can provide an in-depth look into your business’s financial sustainability by scrutinizing the quality of your revenue streams and the reliability of your cash flow.
Maintaining operational vigilance amid negotiations
The allure of a potential sale can easily divert attention from the core activities that make your business valuable in the first place. However, the importance of keeping your eye on the ball – continuing to drive growth, maintain customer relationships, and manage your team effectively – cannot be overstated.
Allowing your business to stagnate or lose momentum can have serious consequences, regardless of whether the sale goes through. Navigating the sale process should run parallel to ongoing business operations, not replace them. This dual focus ensures that your business continues to thrive, enhancing its appeal to the buyer and improving your leverage during negotiations.
Moreover, there is always the reality that deals can fall through, negotiations may reach a stalemate, or the final offer may not align with your expectations. In such cases, a robust and healthy business operation will provide you with the best fallback position.
This article is intended to provide a brief overview of the key considerations to keep in mind when handling an unexpected offer to purchase your business. It is not a substitute for speaking with one of our expert advisors. For more information, please contact our office.
Call us at (302) 652-4194 (Wilmington Office), (302) 730-4560 (Dover Office) or fill out the form below and we’ll contact you to discuss your specific situation.