About 40% of my clients are business owners, or retired business owners. Starting in 2013, I noticed that deal activity was picking up for those owners. Low rates, lots of money in the system, and other factors led to interest in buying good private companies. That activity has increased over time. It’s a seller’s market for business owners, so whether or not you had planned to sell your company you may already have received (or will receive) an unsolicited offer to buy your business.
What should you do?
You should listen though since this seller’s market can turn into a buyer’s one if rates go up and the economy slows down.
What I meant by what should you do, is how do you respond to that offer to buy your business and what are the next steps?
Initial Steps to Take with an Offer to Buy Your Business
- Confidentiality agreement – the potential buyer will want to learn details about your business. I wouldn’t give away the secret sauce right away, and I would require them to sign a confidentiality agreement protecting your information.
- Valuation – you need to know what your business is worth so you can negotiate a good price. Hire a valuation expert. A business broker or investment banker who may end up helping you sell the business can also provide a valuation estimate.
- Build a financial plan – it’s crucial to understand what these numbers mean for you. Will you get enough after-tax liquidity to retire, or at least cut back after the deal? What do you need in a deal to make it work for you financially? Find an advisor to build a financial plan and model out for you what you can afford to spend every year after you sell your business. Finding a Good Financial Advisor can help.
- Open up the process – if one buyer offers to buy your business, it’s likely more would be interested. You may benefit from a competitive sales process. Consult with a business broker or investment banker and see.
Moving Forward with a Buyer
- Letter of intent – if you hear a price you like based on your valuation research and financial plan, the buyer will send you an LOI. At this point (or sooner), you need an M&A lawyer to review and negotiate the LOI. This document has the offer price, deal structure, and general terms. Once signed you’re moving forward with this one buyer like when you accept an offer to sell your home.
- Taxes – deal structure impacts the taxes you pay. Hire a good tax person with deal experience. Don’t assume your current CPA is the right fit.
- Due diligence – the deal’s next phase is where the buyer learns what they need to about the business. Deals can die here. Get your records together to better prepare.
- Purchase and sale – once through due diligence you will have a P&S agreement finalized by your lawyer.
- Post-sale employment – if you are staying on you need an employment agreement. If you’re not, then be prepared to sign a non-compete agreement.
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