When a potential buyer shows an interest in purchasing your business, it’s an exciting moment.
But don’t move too quickly.
You’ve worked hard to create a valuable business, and it’s important that your sensitive corporation information remains a secret, particularly if the transaction falls through.
Think about what makes your business so valuable to a buyer.
Why Businesses Are Valuable
A potential buyer may want to purchase your business for a number of reasons.
You’re positioned as being unique in the market, and customers view your business as different from your competitors. Creating a powerful differentiator is a great way to dominate a product or industry and in turn charge more.
The business has a track record of sales, positive cash inflows, and net profits. Buyers want to purchase a business that generates positive cash flow and can scale.
Recurring revenue streams
According to the Harvard Business Review, acquiring a new customer is: “anywhere from five to 25 times more expensive than retaining an existing one.”
If you’ve generated repeat business, you can grow sales and spend far less on marketing costs.
If you specialize in a niche, you can dig deeper to find out what your customers want, and how to meet their needs. Your target market is smaller, and you can be more creative in your marketing efforts.
The pet industry is a great example.
As The Balance points out, pets are well loved, and there are an estimated 180 million dogs and cats in the U.S. Many consumers are willing to spend large amounts on their pets, which is why high-end pet products are in demand. Pet owners are paying top dollar for gourmet dog food, pet toys, and treats.
Create a disruptive product or service
If you offer a disruptive product or service, you can maximize market share. Customers are willing to pay more for an innovative product or service, and you can sharply increase company profits.
These factors can drive potential buyers to your business, and your most motivated potential buyer may be a competitor.
Why Competitors Become Buyers
Competitors know your business well, and they have experience in the same industry. As a result, they understand the value of your business, and the potential for growth after purchasing your company.
If you’re interested in selling specific assets, such as inventory or equipment, a competitor can easily put your assets to use.
A competitor can use industry experience to market your business effectively. They understand the marketing messages that are effective, and how to move people through the sales process.
Finally, if you sell to a competitor, the transition to the new owner can be smoother. Competitors understand how your business operates, and there is less of a learning curve for the new owner. A competitor may have the business track record and financing to grow your business after the sale.
You need to maintain confidentiality throughout the sale process.
Why Confidentiality Is Important
Every business has a “secret sauce” that drives the firm’s success, and gives management a competitive advantage. That recipe for success must remain confidential, or your business can suffer. Consider what may happen if word gets out.
A competitor can use your customer list, procedures manual, or your pricing method to gain a competitive advantage and take market share away from your firm.
Your employees, particularly your managers, have the institutional knowledge and experience to make smart business decisions. If your workers find out that you are considering a sale, they may consider leaving.
The uncertainty of a potential sale will cause anxiety. Even if you plan on providing incentive compensation, some employees may leave before you can finalize the sale.
Your vendors may also be concerned if they hear about a potential sale. Some vendors may be worried about future payments, and may insist that you pay a deposit for future orders, or that all purchases must be paid in cash.
Perhaps most important, you don’t want your customers to hear about a potential sale until you can communicate the information to them on your own terms. Your customers drive sales and revenue, and these relationships are the most valuable part of your business.
How can you start a sale negotiation and protect the business you’ve created?
Protect Your Most Valuable Asset
You need a team of experts to help you maintain confidentiality, starting with a business broker.
A broker will help you find and evaluate potential buyers, manage the due diligence process, and negotiate the sale price for your business.
A business broker can also help you manage the emotions of a business sale. If a buyer shows a genuine interest in buying your company, the broker will insist on confidentiality and work as your trusted advisor.
There is a risk that a competitor is only using a sale negotiation to learn more about how your business works. In some cases, the competitor is not a serious buyer. To protect your interests, a broker can control the information that you disclose during a negotiation.
Insist that the potential buyer sign a non-disclosure agreement (NDA) before any information is exchanged.
If the competitor is serious about negotiating a purchase, the firm should be willing to sign an NDA. Competitors who simply want your confidential information may hesitate when you ask for an NDA, and you can move on to other potential buyers.
The NDA will state that the potential buyer cannot solicit business from clients, and cannot contact the firm’s employees, vendors, and professional advisors. This requirement should be in place during the negotiation, and after the process ends. What the competitor learns must remain confidential.
An NDA should be signed before you disclose critical information, such as your customers, vendors, and your detailed financial statements.
An attorney is a second member of your team.
Retain an attorney to create and negotiate the NDA. Hiring an attorney is expensive, but it’s the best strategy to fully protect the business you’ve created.
Once the competitor signs an NDA, your business broker and attorney can manage the due diligence process for the sale.
To prepare for due diligence, you’ll need several years of financial statements, and access to a number of documents, including customer and vendor agreements, and your marketing plans. Your team should also include the CPA who prepares your tax returns, and may participate in creating your financial statements.
Your attorney can set up a secure location where the potential buyer can review sensitive information. That location may be a physical location, or a secured website.
Maintain control of the sale process.
Sell on Your Terms
You’ve spent years building a profitable business, and selling your company may be the most important financial decision you will ever make. Work with Raincatcher to protect the business you’ve created, and to negotiate an attractive sale price.
We take confidentiality seriously, and it’s crucial that employees and competitors don’t accidentally find out about a potential sale.
At Raincatcher, we focus on the seller’s needs not our own, and we will tell the seller the hard truth so they can make the best decision. Work with Raincatcher and sell your business with confidence.