As merger and acquisition (M&A) advisors, we often see business owners being approached with what may sound like an exciting opportunity to sell their business, but it can turn into a waste of time and effort if they don’t fully understand what to do next. If you’re a business owner and a buyer unexpectedly comes knocking on your door, keep these steps in mind to ensure you maximize the opportunity.  

Step One: Understand Before You Connect

Before engaging in any conversation about your business and divulging information, know and understand the following:  

• Who is Approaching You. Although someone claims to be a buyer interested in your business, still screen the call by asking questions such as their company’s name, their role within the organization and why they’re interested in your business. This should help you get an idea of whether it’s a qualified buyer, a search firm representing a buyer or a business broker who’s really a random sales call. Occasionally, a business owner will get a call from someone expressing interest in buying their business, however, they don’t have the actual funding for an acquisition, or they are service providers positioning themselves as buyers to develop sell-side leads. If you’re unsure whether the buyer is qualified or not, request they provide their contact information and forward the solicitation to your trusted business advisor so they can screen the individual or company for you. 
• Your Business Goals and Buyer Types. For most business owners, selling their business will be the largest transaction of their lifetime. If you find yourself in this position, think about what you hope to accomplish from this opportunity and how it aligns with your business objectives – are you looking for a strategic partnership, an exit strategy or a combination of both? This groundwork will help articulate your company’s value proposition to prospective buyers. 
  • Identifying your business goals will also help determine if the buyer approaching you is the right fit for your business. In most M&A situations, you will be approached by either a strategic or financial buyer, and understanding the buyer type will drive what information to provide them with.  
• Strategic Buyer: This is usually someone within your industry who sees this as an opportunity to grow their own business by expanding their geographic footprint, penetrating new end markets, adding a new product or service and/or other strategic synergies. With a strategic buyer, they’ll want to understand the numbers and related information that makes the combination worthwhile for them. For example, they may already buy your products or services, so it would save them margin. You could have complementary customers that don’t overlap, so your products and services could be launched in their footprint.  
• Financial Buyer: This is generally an investor, such as a private equity group or private family office, looking to achieve a targeted return. They want to know how investing in your business will build their return and opportunities for growth, plus why you haven’t made those investments yourself. At times, a financial buyer who has investments in your industry can resemble a strategic buyer. 
• Your Company Value. Consider consulting with an investment bank, like Doeren Mayhew Capital Advisors, to ensure you position your business at a fair and competitive value. Avoid overestimating your worth or giving a price, as this could not only deter potential buyers, but also place a ceiling on your business value. If your value isn’t yet aligned with your overall goals, an investment banker can offer advice on how to get there.  

Step Two: Ensure a Non-Disclosure Agreement (NDA) is in Place

Confidentiality is paramount when someone is talking to you about buying your business. Should you decide to pursue the conversation further, request the buyer provide or sign an NDA before sharing sensitive information. An NDA says the information exchanged between you and the buyer is confidential, plus limits how the buyer may use your information. Be sure your NDA also includes non-solicitation provisions for customers and employees. And always, always have a third party, such as your lawyer, an investment banker or other trusted advisor, review the NDA before signing it.  

Step Three: Prepare the Right Company Information

Before just providing what is being requested, realize that this is your chance to make a first impression on the potential buyer. To help maximize your company’s value, be sure to have the information packaged in a clear manner that is easy for the buyer to understand, plus tells a story about your business and where things have changed over the period you are providing information to them. Typically, a buyer will want to see:  

• Financial Statements. We recommend providing two to three years of financial statements, plus the most recent trailing 12-month period, especially if you are growing, on an annual basis. Some buyers will request monthly statements, which is a lot of detail to provide at an early stage. Five years of statements can sometimes be relevant and important if it tells a story about the business and growth in specific areas.  Often these are internal financials because they provide more detail than CPA-prepared financials, but you want to be sure all year-end type adjustments are posted and they are the final consistently adjusted financials for each period provided. 
• Adjustments for Discretionary Expenses. This request varies based on the type of buyer. If requested, it is important to be as thorough as possible. If there are one-time, unusual expenses not typically part of the normal business operations, be sure to share this information, as it helps a buyer see the earnings as they would look moving forward. Also include any personal or discretionary expenses paid by the business on your behalf or above market compensation, including rent or other costs paid to related parties. Keep in mind, you don’t usually get the chance to increase value if the buyer learns these things later. Also provide adjustments to get your company’s earnings before interest, taxes, depreciation and amortization, since this approximates cash flow and is often the basis for an offer. 
• Sales by Customer for Specific Periods. This can be provided with names redacted or in a second phase of information if you are talking to a strategic buyer and have concerns they will figure out competitive information even with redaction.  
• Specific Business or Industry Information. Information related to gross margins, company locations, sales by product line, sales by salesperson and more may help drive your business value, so it’s helpful to share if there is not a confidentiality issue. Also consider who you are sharing this with and what they know about your business and industry. This is less of an issue with a financial buyer since they are looking for business concentrations that may create risk, but not looking to gather competitive information. 

As middle-market investment bankers, we help business owners navigate through these steps if they are approached by a potential buyer, including determining if the buyer is the right fit, serving as your representative to the buyer, preparing your business for sale and more. Whether you’re approached by a buyer or interested in exploring how to prepare for the process, we are here to help. Contact us today to learn more.  

Securities offered through Doeren Mayhew Capital Advisors, LLC. Member FINRA/SIPC.