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It’s a phone call that could entirely change the direction of your business, and your life. And the call comes out of the blue. Someone wants to buy your business. Are you ready to respond?

Gilmore Jasion Mahler partner Greg Taylor says he would be surprised if business owners aren’t getting these calls right now and multiple calls every week. Merger & acquisition (M&A) activity is at a fever pitch and there are no indications that a slowdown is on the way in 2022. Taylor helps lead GJM’s Transaction Advisory Services and says he is hearing from business owners receiving these calls on a frequent basis. Here’s what he says they should be doing, and not doing when the call comes in, and before the phone even rings.

Know What You Want

Taylor says you need to have a good understanding of what you want in terms of the longer-term ownership of your business. Do you want to sell your company 100 percent, or do you still want some participation in the business? A sale could allow your ownership to take some chips off the table and get some money in your pockets, so you can invest in a variety of different endeavors and still have some ownership, and then sell the business four to seven years down the road for even a larger payoff. In short: be clear on what you want in the short term as well as the long run before for you entertain an offer to buy your business. As you ponder whether to retain a piece of ownership, keep in mind that you could be reporting to the new owner. Many entrepreneurial owners find this difficult.    

Who’s Calling? 

“Is the phone call coming from a strategic buyer or is it a financial buyer? And how serious are they about potentially buying?” Taylor says once you get those answers, he can offer guidance and help you move toward the next steps. 

“If they are interested in moving a little bit further, it depends on what size business they are, how serious they are, but no matter what, I would recommend they immediately get a non-disclosure agreement or NDA in place to protect themselves. Even with an NDA in place,” he says, “I would be very cautious about what information you are sharing, especially if it is a strategic buyer. You don’t want to expose too much of your information to someone who could use that to compete against you if a deal didn’t go through.”

Don’t Make This Mistake 

Taylor says there are many potential mistakes a business owner can make in responding to a potential buyer. He says one major mistake is failing to get professionals involved sooner rather than later. As the owner, he says, you’re just too emotionally attached to the business you’ve struggled to build, sometimes for decades. You need the right advisors on board from the get-go.

“In fact, I just had a phone call today with one of our clients. They asked if we could help with some of the negotiations. The owner’s comment to me was: ‘You don’t have the bias, plus you don’t have the emotion.’ That’s exactly right. We can look at it based on what we’ve seen deals look like in their industry and help educate them on what a process might look like should they decide to go through a sale process. We could discuss different types of ownership, etc. I also always recommend, besides talking to us, bringing in a good transaction attorney and, depending on the deal size, an investment banker. The team can ensure the NDA is properly addressed regarding sharing financial information and assist in executing a letter of intent (LOI) as you move through a potential transaction and negotiating a purchase agreement.”

Taylor says getting a trusted advisor and an attorney on board is especially important for businesses that don’t have those resources in-house. He says he sees all too often a situation where they reach out to him too late. When brought in early on, he says, these experts can help negotiate and review the purchase agreement before things get too far down the road. 

“Some people are trying to save on fees but obviously this is probably one of the biggest events they’ve gone through, maybe ever, in their business and selling, especially if it’s a family-owned/closely held business. They just don’t have the experience in a lot of situations of going through even a small deal, and it can really cause issues down the road. Obviously, you want to make the process as smooth as possible, so the sooner you’re having some of these discussions the better.”

Know Your Stuff  

Should a business push itself to know certain things about itself like value, and a potential ideal buyer? In a word, yes, according to Taylor. He says you need to have a clear understanding of what your business is worth, ideally before you ever get the call that someone wants to buy your company.

“You don’t want to get in a situation where you must negotiate against yourself, that’s a no-win situation for you. The other side wins. They have the knowledge. They’ve done more deals, they have the ‘one-up’ on you. If you’re starting to try to do it on your own and not following the proper protocols and procedures, it can hurt you,” he says.

“I think also just having these frank discussions and having reasonable expectations. Every business owner probably thinks their business is worth more than it might be. With that said, you want something that’s realistic and not something that’s outside the realm, and there’s nothing wrong with that. If you think your business could be worth 8x multiple of your EBIDTA (earnings before interest, taxes, depreciation, and amortization) but really the market is saying more like a 6x, well you’ve got to be aware of that.”

Keep It Quiet & Stay Levelheaded

Word of a potential buyer for your business is something you’ll want to keep confidential between you and your key trusted advisors. Taylor says you don’t want to get too many people involved because you don’t want to have a potential mass exodus of employees because they hear the business is for sale, even though the sale might be better off for them. He says you could also wind up having a failed transaction, or maybe you were just exploring options.

“Yes, keep it quiet as best you can. But I will say this, expectations should be that more people will find out by the time the deal is close to being closed than not. You just don’t want to expedite that process or open it up too soon.”  

Beware of “Country Club Multiples”

Taylor cautions against what he calls “country club multiples.” Maybe you’re talking to someone, and they tell you they sold their business for 9x. He says that can be misleading, depending on how that individual came up with those numbers.

“Somebody hears that and says well I should be able to get 9x for my business. I am not saying they lied. It’s just that there could be many different factors that go into a sale that could increase that multiple which might not be, at the end of the day, what the real cash return is, and that’s the other thing that can be scary," says Taylor. "And plus, let’s just be honest, people tend to inflate things a little bit to make themselves look better. So, if somebody got an 8+ multiple, they might round up to 9 even though it was an 8.3x or something, and that could also be based on a full expectation on payout. Many times, especially in today’s world, there are many businesses selling with earnouts, or cash that might come down the road based upon expected targets of the business in the future. They might be calculating earnouts, expecting to get full payout. Many times you don’t get a full payout of your earnouts, so that’s another thing that can be very misleading. I always tell people be careful when you just hear something quoted to you without knowing all the facts.”

Weigh Your Options

Keep in mind that a surprise call from someone interested in buying your business could bring other opportunities. Have you considered who else is out there in the market that may be a good owner, perhaps an owner you’d prefer over the current inquiry? Taylor says now is the time to consider these options.

It’s always better to have a couple of interested parties versus one, he says. You’ll probably get a higher price due to the competition. Once you do zero in on a particular offer, Taylor says it’s very important to have an LOI in place.

“Just remember it’s kind of like anytime you’re courting somebody, things are always great in the courting stage, right? And then you move on to the ‘dating period,’ of it, as I would say. Just ask yourself, if you do have a ‘marriage’ with somebody, is this someone you want to be with long-term or not? And there’s nothing wrong with saying I don’t want to work with these people for five years or ten years or whatever, but you need to think through those things. That’s why I always say the highest offer isn’t necessarily always the best offer.”

Consider your Needs

Depending upon the nature and size of your business, Taylor says consider your needs:

• Do you need a valuation, a Quality of Earnings (Q of E) or advisors who are simply familiar with your estimated business value?
• Do you need to hire an investment banker familiar with transactions to expand the list of potential buyers and drive value?   
• Do your homework on experts you pull in. Be careful that you have strong advisors familiar with transactions. This may not include your accountant, just because you’ve worked with them for 30 years. Transactions may not be their area of expertise.
• Research the potential buyer, whether it’s a private company or perhaps Private Equity or PE group. Ask them about other deals they’ve done. Request to interview some of the businesses they’ve bought, especially if you want to “stay in the business” to some extent. View it as asking for references. You may want to consider it a red flag if someone refuses to provide those references. 
• Clearly determine your role post-transaction. What do you want?
• Look at employment contracts. Are there retainer bonuses for the management team? Sign on bonuses? How long will the contracts be? How long is the non-compete agreement?
• If the well-being of employees is a concern, get the answers you need. Will they take care of your people? Change the business name? Many times, these are very important questions, especially if it’s a second, third or fourth generation business that’s been in the family name.
• Understand the difference between a stock/equity deal vs. an asset deal and understand the tax implications. 

Potential Roadblocks

As with any major business decision, you may face some roadblocks. Here are some Taylor says you need to be aware of:

• Watch out for disconnects. Does the buyer clearly understand all facets of the business? A disconnect on value could lead to the deal falling apart or not reaching full potential sale value.
• Skeletons in the closet: A sell-side Quality of Earnings (Q of E) will root out any skeletons that may be lurking in your closet. You want those coming up early, allowing for an open dialogue. Avoid any surprises.
• Knowing your strengths/weaknesses, of your management team, operations, financial, work- force, customers, and supply chain, just to name a few. 
• Ensure a clear understanding of what is going to happen to the business post-transaction, including your role. If you left or were terminated, what does that mean to your equity? Will you get paid out right away or do you have to wait for another transaction?
• The business itself is important, but the management team that runs that business is as critical if not more, depending on the buyer’s expectation and needs.
• If the buyer is a PE group or venture capitalist (VC), understand what type of ownership there will be down the road. Is it a strategic buy to do a so-called “tuck in” of the business to another larger group of businesses? Another scenario is a so-called “roll-up” in which a construction company, for example, plans to buy five similar-size contractors and “roll them up” into a very large company the PE group may try to sell to a very large strategic buyer.
• Be aware of economic impact on deals. Challenging conditions like the current supply chain struggles can have an impact. The seller may be describing a rosy outlook, but the current economy may suggest too lofty expectations. A realistic budget is important. It can have some wiggle room, but at least be able to explain it. 
• Remember that every deal is different.
• Make sure your experts are objective and experienced. A business broker may not be.
• Trust your instincts. If things don’t feel right, sometimes you need to walk away, or maybe hit the pause button for a few months. 
• Keep this in mind: very few deals go as planned, and there are speed bumps along the way that you may need to maneuver. 

Ready to start a conversation with Greg and the GJM Transaction Advisory Services team? Simply fill out GJM’s website contact form. Be sure to note in the message section that you’re interested in GJM Transaction Advisory Services.

Established in 1996, Gilmore Jasion Mahler, LTD (GJM) is the largest public accounting firm in Northwest Ohio, with offices in Maumee and Findlay. Locally owned, GJM offers cloud-based accounting and provides comprehensive services including assurance, business & transaction advisory, healthcare management advisory, outsourced accounting, and risk advisory. The firm’s professionals specialize in industries including construction & real estate, healthcare, manufacturing & distribution, nonprofit, private equity and utilities.