Entrepreneurs often have a plan to exit sometime in the future, but what if the chance came tomorrow? How should owners react and best manage an out of the blue approach?
Everything is going well. Your business is expanding, revenues are healthy and customer numbers keep climbing. One day you take a call from a private equity group. They are also enthused by your business success – so much so that they want to buy it!
“Companies in growth sectors, such as technology, commonly get approaches both from private equity and trade,” says Dan Bowtell, partner, corporate finance at accountants SmithCooper. “They tend to be approaches rather than offers because the public information on SMEs finances is so limited.”
So, how best to respond?
Owners in the early stages of a growth/exit plan, may view an approach as untimely. “Don’t let them rush you, tell them thanks for their interest but you don’t want to sell at the moment,” explains Jonathan Dunn, managing director of M&A specialists BCMS. “Add that if and when you do decide to sell then you’ll be in touch. By leaving the door open you also give yourself time to think about things like preparation, other buyers, and whether you are emotionally ready to let go of your business.”
Other owners may be in a position, such as close to retirement or with itchy feet, to embrace the approach and see it as an unplanned but convenient exit.
Bowtell urges those owners to engage with the approaching party and find out exactly what they want. “What is the buyer looking for? Understand their rationale,” he says. “Where do they see your value, what is their overall strategy? If they can’t answer, then there is an issue.”
In such cases Bowtell would suspect a ‘phishing trip’. “You could be one of hundreds of companies they have approached looking for one to bite and agree to a sale,” he says. “You need to find out quickly if they are serious before you waste valuable management time on an approach.”
Bowtell urges SME owners not to let the buyer dictate the pace or feel rushed into supplying information, especially accounts. “Unsolicited approaches mean that the business has not been prepared for sale. You do have time though to do a detailed business review both financially and commercially before engaging with the buyer,” he says.
When it comes to sharing information, Bowtell advocates caution. “Be very careful about giving out customer information, particularly if the approach is from a competitor. Tell them some information is too commercially sensitive,” he says. “When it comes to a valuation consider what you think the business is worth now and in the future. When you have an agreed valuation, sign a confidentiality agreement and let them do the due diligence.”
To stoke a higher valuation, owners could try and seek out other interest.
“You could be flattered by an approach but don’t be seduced by it,” says Dunn. “Be proactive and create some competition from other interested buyers. You can then benchmark valuations, buyer motives and terms. Recently we worked with an SME who was approached by a potential buyer. We went out and found other interest and sold it for 60% higher than that first offer.”
Seeking out a range of approaches can also help those still not totally committed to selling. “If your ultimate future aim is to exit then finding out what parts of your business potential buyers are interested in could help shape strategy,” explains Bowtell. “Are they more interested in your technology or a region you are starting to expand in? Always entertain approaches if it helps build your future strategy around exit.”
Rob Darby, co-founder of specialist coffee company 200 Degrees, experienced this after receiving six unsolicited investment approaches in 12 months. “We weren’t seeking any money, but we still met each one for a coffee and a chat,” he recalls. “Some offered us investment and valuations which made you think ‘Wow’ but after looking closely at the figures we saw that it meant taking on too much debt. Others we kept in touch with and discussed how our plans, such as opening new stores, were going.”
In the end it secured a £3m investment from a private equity firm. “Their strategy was aligned with ours and the equity to debt ratio was good. They also understood that, as a small firm with no finance director, we didn’t produce daily accounts figures,” says Darby. “They were patient during the due diligence period. The money has put us on a stronger footing and we have plans to open four new stores next year to add to our existing seven.”