Someone wants to buy my business – how do I know if it’s a good offer?

Looking to sell your business? We asked a corporate finance adviser for their expert tips to help you assess selling options and get the best deal possible.

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They say that selling and buying a house is one of the most stressful life experiences around – but what about selling a business?

Let’s face it, there is lots to think about – not least is the impact of a sale on shareholders and employees.

So, if you’re thinking of selling and receive a pre-emptive offer, it’s understandable if you’re unsure about next steps. Should you explore other selling and business exit options, like going to auction? And how do you begin to evaluate if an offer is reasonable or not?

How a corporate finance adviser would approach selling a business

We asked Matthew Graham, corporate finance director at Hutcheon Mearns, for his advice.

Matthew starts by saying: “Is a bird in the hand worth two in the bush? As corporate finance advisers, this is a question that we are regularly asked by business owners that have received an approach from a potential acquirer.

“Does it makes sense to progress that party’s interest, or should other sale options, which may include running an auction process, be explored?

“As with most things in corporate finance, the answer is nuanced and will be driven by a number of factors. Ultimately, the objective of any sale process, and a large part of the corporate finance adviser’s role, is to maximise value and deliverability of a transaction whilst minimising business disruption and execution risk, and, at the same time, maintaining optionality.”

4 questions to ask when considering an offer on your business

As a corporate finance adviser who deals with buying and selling of businesses all the time, Matthew suggests careful consideration of the following four key questions when facing a pre-emptive offer.

1. Is the buyer credible?

Matthew advises: “Unfortunately, intimating an interest in a business and having the appetite and / or wherewithal to deliver upon that interest do not always go hand in hand.”

A detailed evaluation of potential buyers is essential and should include answering these queries:

• Is the target a sound strategic fit with its business?
• Does it have the financial capacity to deliver the deal?
• Does it have a history of acquiring businesses?
• Could it be fishing in the hope of obtaining access to sensitive information or competitive advantage?
• How well known and trustworthy are the principals?

Matthew says: “Doubts in any of these areas may lead to scepticism around the potential buyer’s motives or ability to transact, increasing execution risk.”

2. Is your valuation compelling?

This is a tricky area. Corporate finance adviser Matthew explains: “Business valuations are more art than science and, fundamentally, a target’s valuation is a function of its desirability. This must be assessed objectively and reviewed in the context of comparable companies and precedent transactions.”

Ask yourself:

• How unique or differentiated is your business?
• How attractive are your products or services likely to be to the potential buyer landscape?
• Do you service appealing end markets and / or customers?
• Do you offer an acquirer a real competitive edge?
• What are your earnings trajectory and growth prospects, and is there scope for synergies on acquisition?

Being armed with a robust assessment of the value of your business will be beneficial whichever path the process takes.

3. Are there other credible potential acquirers?

When it comes to figuring out the best option for selling your business, you need to know what alternative options are realistically open to you.

Matthew says: “A list of dozens of prospective buyers can be compiled for virtually any business but in many cases most of these parties will decide against pursuing the target.

“Direct intelligence gleaned from conversations with top-level management within the buyer population, often on a no-names basis, can identify whether the ‘on-paper fit’ might translate into serious and deliverable interest.

“The acquisition mandates of both strategic and financial buyers are constantly changing and may not align with those set out in company media releases.

“Having accurate, up-to-date intelligence on the investment preferences of potential buyers is invaluable.”

4. Is the company ready for a multi-party process?

Matthew explains: “Typically, the best time to sell a business is when it is trading well. Outperforming budget and continuing to build momentum throughout the process will result in the best chance of achieving an uplift in value.

“However, high activity levels can put strain on the business and the management team which can be exacerbated by layering a transaction process on top.”

The more parties involved in a potential sale, the greater the workload for management, from due diligence questions to information requests and meetings.

Being well prepared with information is key to keeping the momentum going during a transaction.

After all, being slow to provide information or providing inaccurate information could negatively impact valuation or bring a transaction to a complete stop.

Why you should speak to a corporate finance adviser before accepting an offer

While these key questions should help you decide the best way forward, the reality is likely to be complex.

Matthew says: “Your options are unlikely to be as black and white as proceeding on a bilateral basis with the party that made the approach, versus commencing an auction process. Instead, the answer may lie somewhere in between.”

Accepting the first offer from the first potential acquirer is rarely wise, however, other options like an auction may not be worth the work involved.

Matthew adds: “In some cases, progressing negotiations with one or a small group of potential acquirers, whilst preparing the business for auction in the background, may provide the optimal balance of risk and reward.

“For many business owners, contemplating exit options on either a proactive or reactive basis is unchartered territory. However, this is a routine scenario for corporate finance advisers whose experience and expertise can be instrumental in delivering the best result.

“So, is a bird in the hand worth two in the bush? Have both.”

Find out more about corporate finance advisory services, including expert advice on mergers and acquisitions, on offer at Hutcheon Mearns.