BUYING A SMALL BUSINESS

Tom Stemberg on Selling a Small Business

Tom Stemberg is founder and former CEO of Staples and venture partner at Highland Capital Partners in Lexington, Mass.
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Retail pioneer Tom Stemberg is founder and former CEO of Staples and venture partner at Highland Capital Partners in Lexington, Mass. Here, he answers a question about selling a small business.

Q. A competitor is interested in buying my one-year-old company, which should be profitable in April. How much information should I reveal to him?

Chris Reese, i3 Voice & Data, Houston

Tom Stemberg replies:

As CEO of Staples, I always saw it as my role to create multiple options, each of which could result in success. You never want an external force--an interested buyer, say--to control your destiny. The fact that you are about to become profitable is critical. Once you are in the black, you have far greater influence over your future than when you are in continual money-raising mode. You can now tell potential buyers and investors that you do not need their money.

That said, a direct competitor often represents the ideal exit strategy for an entrepreneur because your rival fully appreciates all the good things (and bad things) about your business. As a result, there is no need to give your rival lots of information; he knows what he's getting into. He should be able to give you a pretty firm indication of the price he's willing to pay based simply on your company's sales history and forecasts.

In no case should you reveal proprietary information, such as the names of your customers, until you have a binding agreement. What is to stop your competitor from stealing one of those customers? After your rival has given you a firm indication of the price he's willing to pay, and you have signed a binding agreement--subject to due diligence--then it is appropriate for him to study your customer relationships. After all, he'll want to make sure that none of your customers are about to dump you. To cover your bases, include a line in the binding agreement specifying that if the deal does not close, your competitor may not solicit your employees or your customers for a couple of years.

 

Last updated: Feb 1, 2006




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