10 Questions to Answer Before Replying to an Inquiry to Buy Your Company

If you are like most business owners, you probably receive a steady flow of emails and phone calls seemingly offering to buy your company. As you know, many of these inquiries are junk, coming from somebody on a fishing expedition—and you don’t want to end up on that hook. But, how do you know if an inquiry is legitimate and you should consider replying? You could miss a golden opportunity. Then, if you should reply, what’s the right way to respond without appearing too eager, or without revealing sensitive information to a competitor? The wrong move here could ruin a potential deal, or put your company at risk, or waste much time.

To know what to do when a potential buyer contacts you, you must first verify if the inquiry is legitimate. Then, you need to make sure that you are ready for the stream of questions that will immediately come your way.

Step One – Determine if the inquiry is legitimate.

If you already know the party contacting you, and you know they are a legitimate buyer (or represent one), then you can skip this step. Otherwise, you have to determine who the inquiry is from to evaluate its legitimacy. If the inquirer is vague or guarded about their identity, then it is a waste of your time. For example, be wary of obscure phrases such as “I am working with several buyers…” or “I represent a buyer looking to make acquisitions in your industry…” As long as the inquirer will not disclose who they are (or whom they represent), you probably should not respond.

However, if the person or company contacting you openly discloses their identity, usually you can quickly determine the inquiry’s quality with a little online research in three ways:

• Visit their website(s) to learn about who they are
• Google the person and/or organization to see if any recent events have occurred regarding this person or company, most helpfully if they have been involved with any recent transactions
• Look up the person(s) in LinkedIn to read their credentials and background

Generally, you want to make sure that this person and/or company is established and credible. For example, if their website is “Under Construction,” then probably you should delete the inquiry and go back to work. Or, if they have a website but it hypes only transactions they have done in an industry totally different from yours, then delete and go back to work. Or, if the person who contacted you has a LinkedIn page featuring the bright shining face of somebody fresh off a college campus, then probably delete and go back to work.

If you do not uncover anything that concerns you, proceed to the following ten essential questions to know if you are prepared to talk to a potential buyer.

(Disclaimer: At this point, you should enlist the help of professional advisors who have experience in these situations—people like us. Your company is too valuable and important not to have the best team working for you. However, at NAVIX, we genuinely want to help all business owners, so here are the remaining steps if you intend to do this yourself.)

Step Two – Evaluate if you and your company are ready for this conversation.

There are many risks associated with responding to an inquiry if you and your company are not ready. One is lost time and focus. Potential buyers are notorious for chewing up business owners’ time with ever-expanding information requests. Today, they only want your financials. Next week, they’ll be asking for your customer lists and pricing model. Many buyers look at dozens of companies for each one they seek to buy. So, there is a high probability that you will expend a lot of effort and achieve nothing. A second risk is revealing sensitive information to a potential competitor. Even providing your company’s basic financial information tells a competing organization a lot about your operations, strengths, and weaknesses.

Unfortunately, many business owners wing it when responding to unsolicited inquiries. This practice rarely leads to a successful outcome. To be ready to respond to an unsolicited inquiry, at a minimum, you must know the answers to the following 10 questions. There are many more steps involved to get you and your company ready for sale, but these ten are “go or no-go” issues. Meaning, you must know the answer to these ten questions to consider replying to one of those emails or returning one of those phone calls. If you don’t know the answer to even one of these questions, you will likely reveal to a potential buyer that you are inexperienced (and thus vulnerable) or disorganized (and therefore either not worth pursuing, or not worth top dollar). The ten questions are:

• Do you know your company’s adjusted EBITDA for the prior three years and year-to-date? Most transactions are valued at a multiple of adjusted EBITDA. You could be significantly understating the value of your company if you are talking to potential buyers without having properly adjusted (or “normalized”) your EBITDA. 
• Do you have a feel for what multiples companies in your industry are currently selling for, beyond rumors and boastful country club talk? If you talk to a potential buyer but don’t know the current multiples in your industry, you don’t know if your buyer is offering you a strong price or bottom fishing.
• Regarding multiples, do you know specifically what drives value in your industry? Have you addressed the things that position some companies to trade at premium EBITDA multiples relative to their peers, while others sell at discounts? The answers can vary across different industries and company sizes.
• Do you know the post-tax amount you would need to sell to achieve financial freedom? Bad guesstimates on that front can lead to passing on reasonable offers, or worse, needing to find post-exit employment. We call this your Exit Magic Number™. 
• Are your financial statements bullet-proof? Are your income statements, balance sheets, budgets, and projections readable, credible, formatted to industry specifications, and optimized to maximize value? Many are not. It’s not sufficient that you understand your financials—will a buyer understand and accept them?
• Have you identified all the critical sales, operations, and financial metrics that could potentially scare off a buyer? Are they all trending positively?
• Are all your legal documents current and aligned with a potential sale? That is especially relevant if you have business partners. Just because you own a majority of the stock does not necessarily mean you have authority to sell the entire company. You don’t want to open up the discussion with a potential buyer only to learn your partnership and/or operation agreements don’t address a company sale, which many do not.
• Do you know the information that a buyer will likely request? Buyers initially start with a few documents they ask to see upfront, and then quickly expand to asking for a few dozen and more. Are they organized and readily available? Does your team have the bandwidth to respond to these requests promptly?
• Speaking of your team, if you start talking with a potential buyer, are you prepared to tell the key people on your team? The process with a potential buyer will usually not get very far without help from key managers. Also, buyers will see an increased risk if you are avoiding to include key managers in the process.
• Are you comfortable flying blind? In other words, are you willing to give up the leverage and knowledge that is lost when you deal with a single buyer? Most business owners understand the loss of leverage, and you may decide that you retain the ultimate advantage by being able to walk away from a deal. However, the loss of knowledge can be more problematic. Specifically, how will you know if you should walk away from this buyer? If, after a few discussions, the buyer offers $25 million, how do you know if that’s the best you could do, or if it is even a fair offer? By going down the path with a single buyer, you don’t know if another buyer would have offered you $20 million, or $30 million, or $50 million.

The lack of knowledge is not just about price. Maybe halfway through due-diligence, you are not so excited about this buyer’s plans for your company or your people. If you are talking with only one buyer, you don’t have another buyer to compare their plans for the company. Leverage is essential, but knowledge is power. You will give up that power when they follow through on unsolicited offers.

If you can answer affirmatively to these ten questions—actively, clearly, and unequivocally—then it may make sense to respond to an unsolicited inquiry which you believe to be legitimate. You will still have dozens of more things to do from here, but you should at least be off to a solid start. However, if you cannot answer affirmatively any one of the ten questions presented above, it may be too risky, and it may cost you too much lost time to reply to any of these emails or phone calls. Instead, use your time to get you and your company ready, so that you can properly reply to a future inquiry. To do this, contact us to learn how we can help you as we have helped many hundreds of other business owners achieve successful and happy exits.