When Your Company's on the Market, Play It Close to the Vest
Excerpts from How to Sell Your Business and get what you want!
When selling your business, making it easy for the buyer to learn about
your company isn't your only concern. Some sellers do well by leaving a
few hurdles for buyers. If all the information is readily available, it
inevitably goes to some people who are only casually interested. If you
have an attractive business and are wary of revealing too much in early
talks -- before you know the character and motives of a suitor -- you can
dribble information out in stages.
Start with strategic buyers, those looking for a business fit. Not only
can they pay more than others, they can make an initial determination of
their interest by looking at product literature. Financial statements can
be summarized orally for them. Some sellers might question how much more
information they want to provide before meeting someone.
If the business is to be sold in an auction, you need an offering memorandum
-- called a "book." This lists reasons why the business is attractive.
It provides some history, a description of the industry, products, facilities,
management, competition, and the outlook. It analyzes sales by product
line and usually reveals profit margins by product category. Schedules
of financial details are included. It may tell too much. You don't mind
giving that to someone who buys the business, but what about all the other
people who have seen it?
Some businesses are in demand, and sell quickly. Others are mundane,
and it takes months to find a buyer. The offering memorandum has data that
reveals when it was written. It can be rewritten, but in practice that
seldom happens. Buyers can see how long the business has been on the market
by the age of the offering memorandum.
BUSINESS PLAN VS. OFFERING MEMORANDUM. A business plan can substitute
for an offering memorandum. Companies raise venture capital by showing
potential investors their business plans. Readers expect a business plan
to be prepared by management; readers expect offering memoranda to be written
A business plan is especially appropriate for someone unwilling to list
a company for sale openly. An offering memorandum suggests you expect to
sell the business within the next several months. A business plan sends
no such message, and it does not have to be prepared in secret. If a buyer
picks up a business plan six months after it was written, it has no special
significance. This could be supplemented by a short letter with some key
facts not in the plan, such as details of ownership.
CONFIDENTIALITY AGREEMENTS. Confidentiality agreements are usual
before information is provided. (Consider whether you want one signed before
your name is revealed.) The protection provided is not watertight, but
large organizations are wary of litigation. You probably want the confidentiality
agreement to provide that, if no business combination occurs, the suitor
will not offer a job to any of your employees for a period of two years.
Employees in large corporations are sometimes looking for businesses to
buy themselves, while masquerading as having interest on behalf of their
companies. Asking such people to sign a confidentiality agreement on behalf
of their employer usually requires review by colleagues, thus discouraging
Be wary even after a confidentiality agreement has been signed. If providing
a plant tour would reveal sensitive information, have a least one meeting
with a suitor away from your facility. Get a sense of the motives of the
people, the price they would pay, and the odds of completing a transaction
with this party before revealing your secrets.
UNIONS. For some buyers this is a threshold issue. If you have
a union, make it known early to avoid wasting time with suitors who would
not close: a buyer with no unions might be unwilling to change this status.
MEETINGS. When, where and who to meet -- that's all part of your
negotiating position. Buyer usually comes to seller to see the business.
Buyers want to know and see everything, but it may not suit you to acquiesce
immediately to all their requests. Protecting your business must take precedence
over accommodating a suitor. If you have proprietary technology or systems
or very sensitive employees, you may not want anyone touring your facility
until you have a strong sense of where the talks might lead. You could
meet a suitor for breakfast or lunch at some mutually convenient spot first.
If the buyer is making a special trip of hundreds or thousands of miles,
you can hardly suggest you limit your talks to a nearby coffee shop. For
such people, you may agree to meet at an industry convention or in some
major city where you both have other business. Or you could visit the buyer.
If your lawyer is your confidant, you might consider having the first
meeting at his office, but many of these exploratory meetings are fruitless,
and it will be expensive if the lawyer is in at the outset for each suitor.
And the atmosphere of a lawyer's office is not conducive to quick rapport.
Buyers like to meet the management team, not just the owner. Resist
the urge -- often quite strong -- to please the buyer. Don't introduce
buyers to your key employees until you feel confident that a deal is likely
to be made.
QUALIFIED BUYER. Visitors should be qualified in advance. You
should be given background information (an annual report or other literature),
and it should be clear that they have the necessary resources or a demonstrated
record of being able to finance acquisitions. Buyers, too, want to avoid
spending money on fruitless tasks, so they'll be alert as to how many others
are interested in the business -- a reason to make them aware at the outset
that you are talking to other unnamed prospective buyers.
Many buyers plan to use other people's money. Don't be reticent. Ask
about the funding. Ask how much equity the buyers would invest, and how
much they plan to borrow. Where is the equity coming from? Does the buyer
plan to produce a document describing your business and then send it to
various financing sources? Understand the process -- bankers may be coming
to ask questions about your business, and you might be the principal salesman
for the financing. Ask about other transactions this buyer has concluded.
Learn how prior acquisitions were financed.
VISIT BUYER. At the first meeting, buyers are trying to find out
if the owner will stay and manage the business -- and they are judging
how well the relationship might work. You are making similar assessments,
but yours are more difficult. The first visitor is unlikely to be your
main contact if you sell to this organization. If you are invited to visit
the buyer's office, accept. Here you will meet more senior people, who
do not go on exploratory trips. You will get a better understanding of
the organization, and why they are interested in your business -- and an initial
grasp of how committed they are to the purchase.
Buyers will focus on certain elements of your business. And this
is where you must focus on presenting facts and judgments in the best possible
Historical financial statements are the foundation for presenting the earning
power. If yours understate the earnings, carefully tabulate and explain
the adjustments to show what the earnings would be under different ownership.
Buyers will have visceral views of the characteristics -- trends, size,
growth, threats -- of your industry. Since they may well be wrong, you
must present in your business plan, your view of the potential, and the
basis for your position.
Your competitive advantage -- your strengths versus your competitors' --
will be scrutinized. Don't neglect to make your case.
If you leave gaps in the story, be assured that the buyer will fill them.
Present a complete picture to control the first impressions.
Colin Gabriel (firstname.lastname@example.org) is a business broker in Westport,
Reprinted with permission from
How to Sell Your Business -- and get
what you want!
Copyright 1998, Colin Gabriel
Published by Gwent Press Inc., Westport, CT
Adapted with permission of the author and Gwent Press.
Title available from bookstores, online retailers, and by calling
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