To Talk or Not to Talk to a Potential Buyer?

By François M. de Visscher

  
Maybe you shouldn't just say, "Sorry, not interested." But you should take steps to control the process. A man we'll call Harry Dobbs had given no thought to selling his family's business. But recently he received a phone call from a lawyer who said he had a client interested in buying the company. Dobbs Hardware is a very successful distributor and Harry enjoys being its CEO. However, the call made him stop and think: "Maybe I shouldn't just say, 'Sorry, not interested.' Maybe I should at least look at what this guy has in mind."

It's not unusual these days for business owners to get calls or letters inquiring about their interest in selling or recapitalizing their companies. Two factors have stepped up such queries: an abundance of capital that has financial people scrambling for good businesses in which to invest, and the need for consolidation in today's global market. If someone approaches you about selling part or all of your business, you can just say no. However, your family or your business may be facing some issues that make it timely to explore financial options.

For example, does your company's need for growth call for an injection of capital? Are shareholders raising questions about liquidity? Is there a need to diversify the family's wealth? Does a lack of successors make it necessary to consider the future well-being of the business? Without making a commitment to go through with a deal, you can give a suitor's query serious consideration. But keep in mind that there are other options besides "to sell or not to sell." There's considerable flexibility in the kinds of transactions that are taking place today-from outright, 100 percent sales to deals that provide capital for growth and liquidity in which investors take a minority position. What's more, with so much capital chasing after good deals, you've probably never been in a better negotiating position. So don't be shy about asking for what you want.

It's important to look at your suitor's query as a signal of what's going on in the marketplace. The person who is approaching you is probably also approaching your closest competitor. Even if you say no, you may be facing a change in your competitive landscape if the suitor buys your rival.

If you decide to explore the query, you should control the process, not the suitor. Here are the steps you need to take:

Don't respond alone. Bring in your closest advisers at once, particularly your lawyer and your financial adviser, and keep them involved in all contacts with the suitor. Ask them to lay out all the options available to you-such as selling the business versus an employee stock ownership plan; a recapitalization; or doing nothing at all. Use your advisers and independent board members to educate you about the pluses and minuses of each option as well as the potential consequences.

Determine your objectives before you have any discussions with the suitor. Enlist the help of your family, advisers, shareholders, and board in clarifying the goals. You might decide, for example, that you'd like an infusion of capital but want the family to retain a controlling ownership. If selling is an option, you might want to think about what value you would place on your business. You might also decide that a requirement in any deal is that the business stay in the community, or that the family retain the right to put its name on a new business.

Ask your advisers to have a "just-listen" meeting with the suitor. Don't attend yourself, unless the suitor insists. Without revealing your objectives or other information, your representatives should find out what the other party wants so you can determine how closely their objectives match yours. Your advisers should inquire about the other company's history and what other investments or acquisitions they've made. Following the meeting, ask your attorney to conduct a due diligence investigation of the other company to determine its financial viability and learn more about the principals and their history.

If you want to continue, begin a controlled, step-by-step exchange of information. Start with the execution of a nondisclosure or confidentiality agreement. Then divulge an outline of what your objectives are for the transaction. Follow that with just enough information-company brochures, a financial statement-for the suitor to evaluate your firm's financial picture. (Do not provide an organization chart at this point, or the names of employees, customers, or suppliers.) If the suitor is still interested, you should now expect a letter of intent. The letter will outline in more detail the transaction that the suitor is proposing and should address financial terms, intentions related to the business itself (such as a commitment to retain existing management), and matters of process and timing.

If you decide to go forward, negotiate the contract and close the deal. But don't do the negotiating yourself. Your advisers should handle this for you, with you playing the decision-maker of last resort. During this period, the suitor will be conducting due diligence on your company. As late in the process as possible-when all the issues of the contract are ironed out-you can let the suitor contact suppliers and customers. Ultimately, your board or shareholders will make the final decision to approve the agreement, depending on your company's charter. During the process, it is important to keep relevant parties informed at the appropriate times. Advisers, board members, shareholders, and family need to be informed early in the game and kept up to date throughout. Senior managers should be told once you receive the letter of intent, so that you can make them a part of the team and assure them that you will protect their interests. Tell other employees when you inform customers and suppliers-late in the negotiation stage.

Keep in mind that you can approach others-your bank, for example-while you are going through the exploration process. You might find that someone else will make an offer that better meets your objectives. Remember, too, that you can bow out of the process at any time before the contract is signed. But don't burn any bridges. You may want to reopen negotiations later.

Even if you decide not to go through with a deal, exploring the opportunity will make you more educated about your business, your industry, and the financial options available to you. So you haven't wasted your time-you've become a much more informed business owner.

By permission of the publisher from Family Business (Winter, 2000). Family Business Publishing Company, http://www.familybusinessmagazine.com.