In my law practice, I’ve been incredibly busy for the last 20 years helping owners of private businesses sell their business as they retire. Last year the floodgates opened and I worked on many significant private company transactions. One trend I’ve seen is that business owners are more frequently being approached by buyers. Perhaps you’ve been approached by someone who has indicated an interest in buying your business. If so, be very, very careful.
If you’re approached by a prospective buyer, you need to be strategic, not reactive. It’s very flattering when someone tells you they want to buy your business and it’s easy to get caught up in the rush of excitement. The first feeling is pride that finally someone has recognized what you’ve created. It’s a good feeling and not unwarranted, but beware. It’s also a trap for the unwary and I’ve seen this play out many times. A smart buyer flatters the business owner, perhaps dangling an enticing price. Then they ask for information, which is willingly handed over. With that information, they formulate a plan to acquire your business. However, the owner doesn’t realize they’ve given the buyer all the ammunition to allow them to negotiate a great deal … for themselves!
So what should you do if approached by a person interested in buying your business? Firstly you need to find out more about the buyer, so you should be asking questions, not answering questions. Once you’ve determined this buyer is legitimate and has the means to pay for your business, you should require a strong non-disclosure agreement. At this point, almost every business owner makes the mistake of signing the buyer’s non-disclosure agreement. Not a good idea because that agreement will be drafted for the benefit the buyer. You should ask your lawyer for a non-disclosure agreement, because that form will be drafted to protect you.
The next mistake I see is the business owner delivering the last few years of financial statements to the buyer. Seems logical, but it’s a very big mistake. Believe it or not, within those financial statements will be information that can actually hurt you in the negotiations. You may wonder how your great financials can hurt you, but they can. One example stems from the fact that most owners of private businesses, tend to keep excess cash in the business, even though the business doesn’t need that cash to run. However, when a buyer sees this excess cash, they will assume that cash is required to run the business (working capital) and will expect you to deliver it with the business. That’s a big problem for you. If you keep $1M of cash in your business but your actual working capital is only $200K, then on a sale of your business, in addition to the purchase price, you should be receiving that $800K. Yet, the financials don’t state that excess $800K is not required to run the business, so the buyer will insist on keeping that extra $800K for himself. You can save yourself a lot of heartache simply by providing “cleaned up” financials, presented in a form that truly reflects what the buyer should receive.
There are many other missteps I’ve seen business owners make in trying to sell their business without professional help early in the process. I know this through my deep experience helping business owners like you get a fair deal for their business. Contacting your lawyer early in the process can save you a lot of time and money and help ensure you receive maximum value for your business.