What to Say When A Buyer Calls
First of all, realize that approximately 85% of the approaches you may get from potential buyers will in reality be approaches from intermediaries who may or may not have an actual buyer who might acquire you. The old "I have a buyer for your company" is one tactic less sophisticated intermediaries use to begin a dialog with a prospective seller.
Six Questions to Ask Callers
Begin the conversation by clarifying that you expect the conversation to be entirely confidential. Next, get out your pencil, ask questions, and take notes. Here are six important questions to ask anyone who calls expressing interest in your company.
1. Ask them directly - Are they an intermediary and if so do they have they been engaged by a private equity fund or a strategic corporate buyer who has expressed interest in your company?
2. Tell me about the buyer, what do they do, how large are they, where are they based?
3. Why does the buyer think your company might be a good acquisition?
4. If the buyer is a private equity fund, ask what size companies do they target? What companies do they own that are similar to yours and how have those companies performed?
5. Regardless of the type of buyer, ask what level of profits (pretax profits as a percentage of sales) do they find attractive? What growth rate do they consider desirable?
6. And the most important question, how do they typically value their acquisition targets?
Most buyers have a pre-set formula they use to price acquisitions. It's usually based on a multiple of pretax cash flow the target company generates. Asking this question can help you learn of a range of possible values they may set and provide you with valuable information about the potential value of your business.
Active buyers will often tell you that they fully value a business - meaning they pay perhaps a 5-6 multiple of free cash flow. Buyers who start off by saying that they do not pay the most will probably not be aggressive in pricing, but may still be very good buyer for other reasons, i.e. they pay cash at closing. It's perfectly normal that many of the people you talk with will try to duck the question entirely. They do not want you to lose interest by quoting too low a multiple and are also afraid of quoting you a multiple, because it may set your expectations too high. Both are valid concerns. As a result, ducking the question is not necessarily an indication that they are not serious.
Working with Buy-Side Representatives
If the caller says they represent buyers, ask who they are representing. If they will not tell you, there is a good chance that they haven't been actively engaged by anyone. You do NOT want people casually "shopping" buyers for you. They tend to be careless about confidentiality.
If the buyer's representative has a reputable buyer who sounds like a good fit, ask the caller to send you a nondisclosure or confidentiality agreement that has been signed by both the intermediary and the buyer.
For those callers who admit that they are intermediaries (business broker or investment banker depending on the size of your company) who want to represent you, ask them the same questions outlined above. If they are active in your industry, they should have valuable information from which you can benefit.
Ask them what makes them different or better than others at what they do. If you like what you hear, ask them to send you info on their firm for your files.
If you are serious about talking with a prospective buyer, bring in a good investment banker or business broker who handles sell-side engagements. They can provide you with valuable help in asking the right questions, presenting information about your company, and creating the right image for you with to the buyer from the start. Involving a professional does cost money, but it can greatly increase your chances of putting together a successfully transaction.
Involving a professional also helps protect your confidentiality. There will be far fewer calls into your place of business, if someone offsite handles all follow-up contacts and information requests. I suggest that you start off by paying a professional an hourly rate to do this for you. Most experienced intermediaries charge between $250 and $500 per hour for this type of help.
Of course you can also handle preliminary discussions on your own, but make sure you get a signed non-disclosure in place before you discuss any details about your company. Then proceed slowly and cautiously. But most importantly, take notes. Even if the conversations do not go anywhere, at least you will have collected valuable information that will pay huge dividends the next time you talk with a buyer about selling your company.
Related Tags: small business, negotiation, selling a business, buying a business, merger, acquisition, divestiture
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