When is the right time to exit your business? There is never a clear answer to this question. However, whether you are considering a business sale or not, it’s important to understand your options, so you are prepared when the time comes. After all, an important key to a successful transaction is finding the right buyer. Here are a few tips to keep in mind when working on a potential deal:

Non-Disclosure Agreements

Before you start any discussions, you must begin by executing an NDA or non-disclosure agreement (confidentiality agreement) with potential buyers. We recommend you have your attorney draft the contract as opposed to just signing an agreement provided by the buyer (or from a Google search!). 

It’s also beneficial to utilize the help of a professional M&A advisor. These individuals spend most of their time on M&A transactions, meaning they have the knowledge and experience needed to be an extremely valuable asset to have on your team. 

Financial Documents

Initially, it’s only necessary to provide high-level financial information, such as revenue and normalized EBITDA.  There is no need to provide full financials or tax returns early in the process. You should request that the buyer provides you with a valuation range based on these metrics with the understanding they will have to verify those numbers if you agree to continue negotiations. If the buyer is not willing to provide a range based on these metrics, they may not be a serious buyer.

Formal Offer

If the potential buyer provides an acceptable range, ask them for a list of what they would need to review to submit a formal offer. At this point, you should involve your attorney and M&A advisor to review the list and determine what is necessary to provide. This is especially important if the potential buyer you are in discussions with is a competitor. It is imperative not to disclose too much information too soon. They could potentially misuse the information if a deal is not consummated (even though they signed and NDA)!

Use An M&A Advisor

Most importantly, don’t try to get through this alone! Based on a number of our experiences, we generally advise both buyers and sellers to work with a professional to get the most out of a business transaction. Here are two primary examples of both negative and positive sale outcomes our team has experienced over the years:

Example #1

Company A determines that the Private Equity Group they had been having discussions with for years was the group they wanted to sell to. They understood that a competitive process was an option, but chose not to take that path, as they were comfortable with the offer from this group. The transaction closed successfully, but within 15 months of the closing, the PE Group sold the company for a significantly higher price (with no significant change in the business over the 15 months). This example teaches us not to depend on factors like industry and location. Going through a competitive process is the only way to understand the full value of your business. Although, in this case, the initial sale price was slightly above the average of similar companies in their industry, it was not representative of the actual value of this particular business.

Example #2

Company A signs a non-disclosure agreement with a potential buyer; they provide them with the appropriate financial information and then receive an offer. Shortly after, Company A hires Lutz M&A to run a competitive M&A process, which includes this particular potential buyer. Based on the competitive process and properly presenting the company and its financials, the buyer ended up raising their offer to over 70% higher than their original offer (and was not the highest offer!).

Benefits of Hiring an M&A Advisor

We have many examples, similar to the two above, which is why we strongly advise business owners to engage in a competitive M&A process. Here is a list of some of the key reasons we believe this is the best course of action:

• The competition of having many potential buyers drives up the price.
• There’s a better chance of meeting the right buyer for the business (note that many of our deals have gone to buyers that were not the highest bidder!).
• This process typically ensures ‘backup’ buyers if the deal with the original buyer falls through.
• The systematic process helps reduce the amount of time it takes to close the deal. The selected buyer will know other suitors are waiting for their shot at the business, which keeps them focused.
• At the end of the process, the owner will feel as though they found the best buyer at the best price for their company.

Selling your business will be one of the biggest decisions you ever make. It’s never too early to begin exploring your options. Contact Lutz M&A today to start the conversation!