What if someone makes you an offer?
Tuesday, July 8, 2008/
Imagine an out-of-the-blue offer to buy your business lands. Even if you don’t intend to sell, it’s important to have an idea of how much your business is worth and how you would react . By TOM McKASKILL
By Tom McKaskill
Even if you don’t intend to sell, just for your market value’s sake every interest-holder needs to be included in that ‘what-if’ conversation.
Imagine you have just been approached by a large competitor who wants to buy your business and is prepared to offer you a 100% premium over your estimated market value. With great excitement you immediately contact your two partners with the intention of arranging the sale.
One partner reacts positively, but says the business is worth more than the offer. The other reacts negatively and states that he sees working in the business until he retires.
While you desperately try to gain an agreement to sell, time slips by. After a month with no resolution in sight, the potential buyer withdraws the offer.
Your pot of gold has slipped out of your grasp.
Is this situation unusual? Actually no! Few small and medium sized businesses that are profitable and growing contemplate selling out. Perhaps the idea of selling out one day is in the back of their minds, but they have never seriously discussed the issue.
In fact, it is not just partners who need to be part of a possible conversation; it is shareholders, directors and key managers and employees. It needs to involve anyone who has to sign off on the deal as well as anyone who is critical to creating value in the business and enabling that value to be transitioned to a new owner.
What we tend to forget is that few businesses are actually sold when the interested parties finally get around to deciding to move on. Many are sold in haste due to an internal or external crisis, or quickly when an attractive offer is made for the business.
In both these scenarios, the owners do not set out to sell – circumstances either dictate the sale or an external party initiates the process. When such a situation occurs, time is often of the essence and any delay will either erode value or terminate a sale discussion. Only by being able to act quickly on behalf of all the interested parties can a business owner secure the best value.
It is not unreasonable that different parties will have differing views on what the business is worth, how it should proceed in the future and what the ultimate goal is. In some cases these will be very opposed views.
One party may desire the security of tenure while another might wish to have the money to pursue another venture. An external director may see disruption to their local community if the business is relocated, while a family investor may be concerned about employment for younger generations.
A key manager may be unwilling to work for a large corporate buyer and prefer to leave rather than continue with the firm.
Without the conversation, these views are not surfaced and dealt with.
Planning for a possible sale takes the various views of the stakeholders into account to arrive at a consensus. The collective views may be very different when faced with the collapse of the firm compared to a premium sale.
Surfacing personal expectations and sale preconditions is critical for any negotiation. Understanding when you can sell and under what circumstances allows the negotiator to ascertain quickly whether an offer is worth considering. It also means that the process of gaining widespread agreement is fast tracked if the timescales are short.
At the same time, the discussions can help to bring focus on what to do in a sale situation. When all parties understand how quickly value can erode in a protracted sale, additional preparation work might be undertaken to make sure the firm is ready for such an eventuality.
Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia.