Andy Moore, Managing Director, gives his views on the relative merits of negotiating with a single purchaser and running a competitive auction process with multiple parties
Many business owners at some point will be approached by a potential purchaser. But how should you respond to such an approach and should you open up the discussions to other parties as well?
Always ask the purchaser why they contacted you and ask them how much they know about your business. Quite often, the approaches will be speculative and not well prepared. This should be a signal that the buyer is not serious.
If the approach appears serious, there is no harm in responding with “We have no plans to sell but everything is for sale at the right price!” Never give any indication that you may be considering selling. If you feel that the buyer is serious and you are happy to meet them, invite them to visit you (preferably on neutral ground) but make sure you meet one of the decision makers. If they are not prepared to do this, tread carefully – another sign they are not serious.
Let the buyer do the talking first – ask them to explain their strategy, why they approached you and how your business would fit into their strategy. Importantly, ask them to talk about some of their other deals and if they have been successful.
You can then give them an overview of your business and importantly, talk about your growth strategy. Don’t get drawn into a discussion on your current financial performance and valuation – this is far too early to be talking about numbers.
Keep the first meeting high level and don’t give too much away – it is up to the buyer to convince you that they are serious. Ask the buyer to reflect on the discussions and to let you know if they are interested and in the meantime you will give it some thought.
Quite often an approach is what gets a business owner thinking about his or her future. At this point, you should always try to talk to someone – whether it is your accountant, adviser, friend, family etc. If you honestly don’t feel the time is right to sell, you can always say “thanks for your interest, and please feel free to keep in touch, but now is not the right time”.
If you are more open to continuing the discussion, should you consider talking to other parties as well? The textbook answer to this is that you should always run a competitive sale process to ensure the market determines the optimum value. And unless you do this, you will never know if you have optimised value. But the decision to sell should not always be based on optimising value. There are merits of talking to one purchaser – it is less time consuming, it minimises the risk of confidentiality breaches, and the buyer may well be prepared to pay more for an off market deal.
It also depends on the nature of your business and the number of likely purchasers. If you own a very niche business with few obvious buyers, there could be a strong argument for progressing the discussions. On the other hand, if you know there are a number of buyers who would be interested, it is likely that a competitive sale process will result in a better outcome.
The dynamics of an off market deal are also very different to a competitive sale process. After the initial courtship process and a deal is agreed in principle, the balance of power shifts to the buyer. The buyer now knows you are a willing seller and he knows your price. The key now is to ensure the deal is done as quickly as possible to avoid distraction and to ensure the buyer is not given any opportunity to renegotiate the deal. This is a common occurrence and a major risk in not running a competitive process.
Many off market deals are a success, but think carefully before deciding on your right partner!