Taking unsolicited calls from those looking to buy your business may feel good, but rarely makes sense.
Many of you, especially the more visible firms, have been peppered with inquiries from unsolicited buyers the last few years. It usually starts with a fax, phone call, email, letter, an in-person meeting request or even a handshake at a conference – stating something to the effect of,” We have a client who is interested in purchasing your company or we are looking for investments in businesses like yours…” Yes, we know it feels good to hear someone wants you. Our advice: Don’t pay any attention to these people. Resist the temptation to buy too much into the flattery, as you’re being baited. Most deals started like this don’t get to the finish line, and the ones which do generally pan out in favor of the buyer, not the seller (you). Let us explain why.
All LBM firms have them – wonderful customers who don’t bid you out. You’ve used whatever tactic you had in your arsenal to get them comfortable enough to trust you’ll treat them right on price. The result? Better margins for you. Those “fishing” for deals/investments are no different. When you take the bait, it usually means they will pay less for the deal in the form of dollars, deal structure or terms. The reality is, buyers/investors LOVE speaking with sellers one on one. Why wouldn’t they? They are happy to waste some time on you, because they know there isn’t anyone keeping them honest. It’s a chance to tilt the table towards them. Some will even openly laugh about it.
Let’s say you still want to go down the path of exploring a deal with this unsolicited buyer. Here’s some food for thought:
- You’re about to spend a whole lot of time helping this interested party understand your business. To accomplish this feat, you and/or your senior management team will pull focus away from the business. What do buyers pay you on? Earnings. What goes down if you don’t focus on it? Earnings. Most deals take six (6) to ten (10) months to consummate and buyers will reduce their offer if you don’t hit your budget during the process. For example, before hiring us a recent client of ours wasted almost all of 2014 trying to get a deal done with just one private equity firm. Most of the time was spent helping the private equity group understand the business and the industry at large. They had discussed valuation initially, but when the review was over and everyone was ready to discuss valuation again – earnings had dropped and so did their offer. This time would have been better spent focusing on the business, not educating a suitor. A whole year down the drain and back to square one.
- You will likely have no backup buyers, as it is a monumental effort to handle just one interested buyer. What if your interested party changes their mind and you’ve done all this work for naught? It happens all the time, for all kinds of reasons.
- Do you truly have any idea what a fair valuation is for your business? The truth is that it is impossible to know, because (a) you aren’t in the market every day, and (b) the market is what the market will bear and the only way to find out is to approach multiple groups and create some competition for the deal.
Unbelievably, despite being on the wrong side of this equation, many LBM owners attempt to cut deals on their own. We can us assure you, for every deal you hear about where it works out, the vast majority don’t. The deals that do get done, aside from rare cases – the seller usually loses and might not even know it.
LBM owners laugh about non-industry, finance types who come into the LBM space thinking they will teach us a lesson or two. How many have failed miserably? Keep this in mind as you tread into their area of expertise. These are people who have spent years learning how to cut financial deals that benefit the buyer, NOT the seller.
When you truly are ready to sell your business, our advice – even if it isn’t us – is to hire someone who knows what is going on in the LBM deal market, and who can bring a high level of deal making horsepower to your side of the table. The cost to keep buyers honest and run a sophisticated sale process will pay for itself many times over.
Besides, knowing you got the best deal possible will feel better than telling your industry friends you did it all on your own. You (usually) only sell your business once in a lifetime. Get it right.
This article originally ran in the May 2015 issue of LBM Journal.