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3 Mistakes To Avoid When Someone Offers To Buy Your Business

Flub an acquisition offer and you could end up regretting it for life.
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According to our latest research over at www.SellabilityScore.com, the proportion of business owners getting an unsolicited offer to buy their business is up to 16 percent for the quarter ending June 30, 2014. That's a 37 percent increase over last quarter.

Big companies have cash to burn. Interest rates are at record lows and stock markets are at their highest point in history, which means virtually every acquisition deal is accretive for a big public company.

With all kinds of cheap money sloshing around in the financial system, the chances that you will receive an offer for your business is at its highest point since we started measuring the liquidity of private businesses back in 2012. What should you do--and what should you not do--if you get approached by someone who wants to buy your business? Here are three mistakes to avoid:

1. Signing a Letter Of Intent Too Early

Most acquirers will try to buy your business without competitors bidding up the price of your company (they call this a "proprietary deal"). The acquirers will ask you to sign a nonbinding Letter Of Intent (LOI), which almost always provides the acquirer 60 days of unfettered access to your books to perform their due diligence, during which time you can no longer negotiate with any other buyers.

The longer the due diligence drags on, the higher the chances the buyer will lower their bid knowing your other potential suitors may have moved on. Eventually you'll have to sign an LOI, but do so only after a competitive bid process ensures you're getting the highest price possible for your company.

2. DIYing It

It's tempting to avoid the fees of an M&A professional and negotiate the sale of your business on your own. After all, you're the one who built the business and you may be squeamish about handing over a big chunk of the proceeds to a guy or gal who shows up at the last minute to help you sell your life's work.

M&A professionals get paid through a combination of a nonrefundable "work fee" (maybe $50,000 over six months) and a success fee from which the work fee can usually be deducted. The success fee is usually a percentage of the proceeds of a sale--maybe 4 or 5 percent on a $10 million business.

Why would you hand over 5 percent of your company to a guy or gal who has done nothing to help you build it? First, an M&A pro is going to set up a competitive bid process, which will (hopefully) garner you multiple bids. The presence (or even the threat) of another buyer forces the acquirer to sharpen his pencil, and it can easily add another $500K to your deal.

Next, an M&A professional is going to act as a foil between you and the buyer. There may be times during the process of selling your business that you want to lean across the table and throttle the guy on the other side. It's a natural reaction to the clinical approach most buyers take to a negotiation. When you feel your temperature rising, you can walk away and let your M&A professional express your displeasure with a cooler head. Your M&A pro can also play the role of "bad cop" when you need to be insulated from a prickly negotiation point and ensure that you stay on good terms with the company you'll most likely end up working with for a certain amount of time after the sale.

3. Playing Too Hard To Get

Given the first two points above, you may be tempted to rebuff any approach from an acquirer, but that too may be a mistake.  Business buyers have plenty of options and may dismiss an acquisition opportunity outright if the owner seems overly arrogant or standoffish.

There is nothing wrong with grabbing lunch or a drink with a potential acquirer. At the very least, you can use it as a fishing expedition to learn more about their company. When the conversation turns to your business, keep things high-level while gently steering the conversation back to them.

If an acquirer asks you a direct question like, "Would you consider selling your business?" or "How much do you want for your company?" you can thank the person for their interest and assure them that any offer they make will be taken seriously by both you and your board. If you don't have a board, that's okay; the buyer doesn't need to know that, and saying you'll need to consult your board will buy you enough time to engage an M&A professional to represent you.

Getting an offer to buy your business is both flattering and exciting. Play it right, and you may be able to turn a casual inquiry into your biggest payday yet.

Last updated: Jul 28, 2014

JOHN WARRILLOW | Columnist | Sellability

John Warrillow is the author of Built to Sell: Creating a Business That Can Thrive Without You and the founder of The Sellability Score, a cloud-based software company that helps business owners improve the value of their company.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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