The Denver Post | BUSINESS
POSTED: July 22, 2018 at 6:00 am
By GARY MILLER | firstname.lastname@example.org | GEM Strategy Management, Inc.
Most business owners know that merger and acquisition (M&A) activity is very robust.
According to Deloitte LLP, in The state of the deal, M&A trends 2018 report,
“Corporations and private equity firms foresee an acceleration of M&A in 2018 – both in
the number of deals and the size of those transactions”. For business owners, this is
good news. However, this flurry of deal activity results in unsolicited offers for many
small business owners. That is what happened to Joe, the owner of a small
Joe called me wondering what to do since he had received an unsolicited offer to buy
his business. The buyer was willing to pay him three times annual revenues, plus his
net assets on an earn-out basis over the next three years. In addition, there were no
non-compete clauses in the offer. However, the purchase price had to be supported by
an independent, certified valuation.
On its surface, this deal seems workable. However, Joe was caught off guard since he had not seriously considered selling his business. He didn’t know what to do. Following is the advice I gave him.
First, be careful about how much information you divulge to the person representing the
buyer. Request a signed confidentiality agreement from the potential buyer. A genuine
buyer will not balk at this request. Consider if the offer is coming from a legitimate
potential buyer or from a buyer with ulterior motives, such as acquiring intelligence
about your business and its customers. It is critical to conduct proper due diligence
up front to understand the suitor’s motivations and whether to engage.
Second, take time to consider whether or not you want to sell your business now. Many
owners wait to begin thinking about selling their businesses until their businesses are
declining or they have been hit with unexpected major events, such as divorces, severe
illnesses or deaths in the family, or losses of key employees, large customers or key
suppliers. As a result, owners react, by making emotional decisions rather than strategic
ones. Owners, who plan ahead, are more likely to extract higher values for their
businesses when they are highly profitable and positioned for strong growth.
Third, if you are interested in selling your business, seek help immediately from
professional M&A advisors. They bring professional experience and expertise and
provide significant value by helping you understand all of your options and help you avoid making emotional or irrational decisions. Know that you are at a disadvantage, to begin with, since most buyers, who tender unsolicited offers, have made other acquisitions. They are sophisticated and come with M&A advisors who are strong
negotiators. Generally, most business owners who receive unsolicited offers haven’t
taken the time to prepare their companies for sale. As a result, they often leave money
on the table which is just what potential buyers are counting on.
Fourth, consider whether you have enough capital to continue to grow your business
and stay competitive. Seeking external capital or recapitalizing by selling a minority or
majority interest in your business could be a better option than an outright sale of all of
Fifth, look at the market you serve. Consider both the short-term and the long-term
prospects for a promising future. You may find, while business is good now, the long-
term prospects are going to be challenging due to emerging trends or new displacement
technologies that could threaten your current business model.
Sixth, many times unsolicited offers come from so-called “private investment search
firms”. These are firms, formed by a group of investors, who promise to fund a potential
acquisition if the right deal comes across their platform. The investors hire a fund
manager to seek out potentially good deals. Once the fund manager has found a
potential target and gone through the transaction process with the seller except for
drafting the definitive purchase agreement, he goes back to the investors and tries to
“sell” the deal. All too often, one or more of the so-called investors balk at the deal and
the potential transaction falls apart. In the meantime, weeks or even months have
passed leaving the owner empty-handed after spending countless hours, energy and
money trying to get the deal closed. The message is obvious –owners should vet the
potential suitor to ensure the search fund has been fully funded and has the financial
capacity to acquire your business.
Finally, identify what methodologies the potential buyers are relying upon to value your
business. This is critical for business owners looking to maximize value. Price is
generally based on a multiple of some form of normalized earnings/revenues.
Therefore, higher adjusted earnings equate to higher purchases prices.
Most business owners need help to sort through the intricacies of selling their
businesses. It is wise to consult qualified advisors such as M&A consultants, transaction
attorneys, accountants, and wealth managers.
Joe did just and wound up closing the deal of a lifetime.
Gary Miller is Founder & CEO of GEM Strategy Management Inc., and M&A consulting firm, advising middle-market private business owners how to prepare to raise capital, sell their businesses or buy companies. He can be reached at 970-390-4441 or