It's a sellers' market, but buyers are the aggressors. Buyers and their brokers are relentlessly calling on business owners to lure them into talks. Beware: flattery is part of the pitch. If you receive a misspelled, careless letter from a broker describing many clients, it's probably worthless. "Clients" in the plural signals the broker's intent to look for a buyer if you respond with interest. A broker writing and describing the specific interests of one buyer may merit attention. You could ask for details, saying you are not interested in selling now but might be one day.
A broker may claim to represent a given buyer, but that can be misleading. Some buyers enter into agreements with dozens of brokers, agreeing to pay them if they initiate deals that are consummated. Be cautious. If you seem interested, you could find people calling your customers and competitors to check out your reputation, and the resulting rumors could hurt your business.
If an inquiry tempts you, think through what will follow. If you want to sell, don't tie your fate for months to a single buyer without making comparisons. Nothing protects a seller's position better than having a competitive buyer in the wings. Moreover, hearing "Thanks, but no thanks" is the ultimate insult after you have revealed all your secrets during months of talks, and it's also vexing to explain to employees. Although the termination of the deal could easily be attributed to problems in the buyer's business, your company could end up tainted after employees, customers, competitors, and other potential suitors learn that a deal collapsed.
When the inquiry comes in and you make your initial response, everything is confidential and low risk. But to reach the point of a closed sale, certain steps are inevitable. After some gentle fencing, you agree on a price, which is usually incorporated into a letter of intent (also called an agreement in principle). At that point the buyer asks you to stop all efforts to sell to anyone else in exchange for the buyer's commitment of time and money to try to complete the deal. Now the buyer wants to begin due diligence, the investigation of your business to verify that you portrayed it accurately. It is unrealistic to continue believing that you can keep a possible sale secret from your employees. You'll begin a period of uncertainty for a minimum of 8 to 12 weeks, during which time the buyer in effect has an option to buy your business at the negotiated price but is not irrevocably committed. Sellers should remember that many deals collapse, or undergo major changes in their economics, after a handshake on the price.
Colin Gabriel is a business broker in Westport, Conn., and the author of How to Sell Your Business--And Get What You Want!
Glossary
Agreement in principle. An outline of the understanding between the parties, including the price and the major terms. It is often referred to as a letter of intent. Usually, the agreement is subject to the negotiation of a mutually acceptable definitive agreement.
Auction. An invitation for bids on a business by a specified date. In practice, the date is often extended for the three or four top bidders, who then are invited to improve their offers.
Basket. A designated sum below which claims will not be made for breaches of representation and warranties (or other indemnification claims).
Book. The term used for the memorandum that describes a business for sale.
Comfort letter. A letter provided by independent accountants reporting on the financial condition of a company, usually for an interim period since the last audit.
Flipping. The sale of a company within a year or two of its being bought.
No-shop clause. An agreement between the prospective buyer and the potential seller to stop discussing for a defined period the sale of the business to others.
Pure play. An acquired company that is in only one business.
Selling memorandum. A description of the business including its history, products, markets, management, facilities, competition, financial statements, product literature, and a review of its prospects.
Tips from the Trenches
Price is not everything. Feeling right overall about the sale a year later matters too.
Experienced professionals may and should coach you, but you must control the negotiations. You have the big economic stake, and you, unlike your advisers, may go to work--for years--for the new company.
Talk to people who have sold businesses to your buyer. If no names of sellers are made available to you, you might legitimately question why.
Get bids for an audit. Some reputable accounting firms discount their fees to attract young, growing clients.
Disclose everything. Problems uncovered late impugn your integrity and threaten the price--and the deal.
Run the business, right up to the closing, as if it will be yours indefinitely. It might be. Resist the urge to accommodate the buyer--protecting your business is a higher priority.
