Exit by Acquisition for small business owners.

For more and more owners Exit by Acquisition (“EbA”) will be how they sell their business.

Business owners can expect the frequency and number of direct approaches from potential buyers to increase.

Whether actively thinking of selling, or not, you’re better off engaging with, and ‘harvesting’ enquiries if they are from legitimate potential buyers.

Later in this article I provide an outline of what you should & shouldn’t say and do, to help determine the bona fides of one of these potential buyer who call out of the blue.

I've written before about the shortcomings of traditional business broking when it comes to selling a business [https://www.dhirubhai.net/pulse/when-traditional-business-broking-cant-work-michael-kerr/?trackingId=yJ6cx96%2FQLm0%2Btl20PROQw%3D%3D ].

When dealing with direct approaches it's no different. The traditional approach to selling i.e. business broking, and/or 'vanilla' Exit Planning just won’t cut it

In the past the potential buyer was often from the same industry, maybe a competitor, a supplier or a customer.

For bigger small businesses the approach might have been from a Private Equity group.

Now it might be an employee.

Note: when dealing with a competitor (supplier or customer) some of the tips below will be helpful but there are additional complexities and they aren’t addressed here.

But increasingly it might be an aspiring entrepreneur or a #SearchFund.

In this article I wanted to draw attention to the fast emerging phenomenon’s of #AcquisitionthroughEntrepreneurship (“EtA”) and Search Funds.

Both are driven by a simple and fundamental shift in appetite away from starting up, to buying an established (and less risky) business.

?What is EtA?

"Entrepreneurship Through Acquisition (ETA) involves?buying and growing an existing small business that has already demonstrated product-market fit. Individuals who pursue this path are commonly called 'searchers'. The size of the deals can range from $25,000 to $25 million for a single company." www.venturelab.upenn.edu/eta

EtA is ‘all the go’ in the US and will trend the same way here.

Elite business schools including Kellogg, Harvard, INSEAD and Columbia are running tailored courses.

"Entrepreneurship Through Acquisition Is Still Entrepreneurship." www.kellogg.northwestern.edu

The US Small Business Administration program https://www.sba.gov/funding-programs/loans is also a very significant financing enabler that is helping more executives leave corporate to buy an established business.

The other obvious benefit is it fuels a higher rate of transition (or succession) of #SMEs . We have that same issue but unfortunately nothing like the US SBA program in Australia.

If you are interested in a fuller understanding of how SBA loans work and the opportunities the program search up my Small Business Banter podcast discussion with Curtis Small Business Finance Solutions, LLC dba Deb Curtis

What is a Search Fund and why do they matter?

A?search fund?is an investment vehicle through which an?entrepreneur ?raises funds from?investors ?in order to acquire a company in which they wish to take an active, day-to-day leadership role. Search funds can also be financed through self-funding. In this scenario, the entrepreneur leading the acquisition will use their own resources to purchase and take ownership of the business, rather than relying on funding from external private investors. www.wikipedia.org/wiki/Search_fund

There are plenty of articles and press to read and get up to speed.

But as I said at the start more of you business owners will get one of these calls.

• The timing won’t always be ideal.
• You may feel like the business could be better, or has some near term growth potential.
• You may not feel sale-ready ?

But here’s the thing. This approach might be the best opportunity you’ll ever get to sell.

So you should ‘play this out’ to determine what a deal might look.

Yes you definitely must vet the interested party and follow a few other steps, and I talk about them below. But you should treat these approaches seriously.

If you don’t selling the traditional way may be your only option.

And that approach isn’t any where near as clean and quick as most owners assume, or are lead to believe.

The process of setting your business for sale, and then advertising, and then dealing with ‘potential’ buyers and staff who get wind of the potential sale is incredibly challenging.

It’s invasive, it’s long-winded (no time guarantees here), it’s stressful and yes it’s hard.

If you want to avoid that pain here’s the key things you need to know to help you capitalise on the call you get ‘out of the blue’.

Objective #1 - leave a good first impression.

In that first call from any potential buyer you want to leave them with a few key messages.

1.? You’re not surprised by the call.

2.? You have thought about and have a sense of what an ideal exit plan is. But you do not need to go into any detail then and there (if you haven’t ever considered your exit plan or are just unsure give me a call??).

3.? While you may be open to discussing a potential sale now is not the time, and it would need it to be done in a more formal and structured way that you can spell out for them. If the caller is a genuine and experienced buyer they will respect this approach and agree to playing by your rules.?

Objective #2 - be careful about what you say.

During the early stages of a discussion like this you don’t need to divulge any specific details about your exit plan, or how you would like the discussions to be structured.

The objective is simply to create some time and space for you to think this through and to sound confident and credible so that the buyer won’t take you for an easy target.

So obviously don’t say things like:

• I’ve been thinking about selling but just haven’t got around to doing anything about it!
• I’m really over this business and am so glad you called!
• I’ve just had a health issue or break-up with my business partner or key staff member and am not sure if I can continue to effectively run the business!

Objective #3 - don't be loose with your sensitive business information.

After the initial pleasantries lot of potential buyers will quickly get down to business. They’ll nicely ask you for a comprehensive list of information to help them with their evaluation.

In some cases they might even offer to sign a non disclosure agreement (NDA) to give you comfort about dealing with them and sharing commercially sensitive or private information.

This can be exciting and you might even start to think how good it would be not to have to prepare and go through a formal sale process.

But before you get too far ahead of yourself and start sharing sensitive information, even with a signed NDA, you need to be aware that there are potential traps.

Following are some tips that will allow you to best handle those calls and more effectively work out if there are genuine prospects for selling your business, on terms that are reasonable for you.

Tip #1 - don't share any potentially sensitive information about your business without signing an NDA.

Tip #2 - don't share any and all information just because you signed an NDA.

Tip #3 - don’t sign an NDA without understanding things like:

• Who exactly you are dealing with?
• Why they are interested in your business?
• How they will fund the acquisition (and note that owners being asked to provide some of the financing especially for the EtA buyers will become more common placed. You shouldn’t dismiss Vendor Financing out of hand but it’s another aspect of a potential deal that needs sound advice)
• What is their process for evaluating your business?
• What is their proposed timeline for getting from a signed NDA to an offer (if it all goes really well)?

Tip #4 - do use a Memorandum of Understanding (MOU) or a Letter of Intent (LOI).

There is a lot of work to be done between the first call and an offer for your business.

To avoid a potentially good deal falling over, which happens a lot, you need a structured process for both parties to follow.

The structured process needs to define timings and expectations at key stages.

An example of some of the more important include:

• What is the (proposed) financial offer and how is it structured?
• How is the offer to be financed?
• What does Due Diligence cover? And how long will it take?
• What information is to be shared and in what form? (e.g. at what stage do you use detailed and/or identifying information?)
• What are the reasonable timeframes for each of the key stages?
• Which people are to be involved?
• Are there any deal conditions e.g. finance?

To increase the likelihood of success consider using some kind of written document like a Memorandum of Understanding (MOU) or a Letter of Intent (LOI).

Both are much underused in small business transactions.

A well written MOU or LOI (from an experienced adviser) is a simple but powerful way to scope out what you and the potential acquirer can expect and by when – a bit like a mutually agreed project plan.

They are enormously helpful in guiding discussions and keeping the process (and negotiations) on track.

While they won’t guarantee an offer will be made nor the price or any other deal terms it should at least spell out upfront what all the steps are to get there.

Don’t fall for the trap of thinking that these more formal written documents are ‘over the top’ or just for big business. They are actually a highly effective and organised way to sort the ‘wheat from the chaff’ and keep the sale process, which is usually drawn out and often emotional, on track.

If you are in any doubt think of it this way.

If you can’t negotiate a basic MOU or LOI with the potential buyer then what are your prospects for negotiating a sale agreement and deal (including transitioning with them)?

Objective #4 - create a 2 way conversation.

Be bold! This is your business, and your time.

Don't be afraid to ask the potential buyer any questions in the early stages of discussion:

• Why are they interested in your business?
• What is their industry and/or business experience?
• What other business have they bought and how?
• What is their timeframe?

These are fair questions to ask, even when the potential acquirer made the first approach.

The big bonus for you is this. If you understand their reasons (i.e. what problem of theirs you are solving) then you stand a much better chance of extracting the most amount of value from them.

For genuine buyers it reinforces that you are not ‘easy pickings’, and that they are dealing with an organised, well-prepared seller.

In some cases asking these questions will be appreciated by the potential buyer as it will help to work out quickly and efficiently work out if this is a deal of mutual advantage.

And if the deal does end up going all the way then you (as seller) will more likely do the deal on your terms.

If any of these questions get a potential buyer offside then that’s ok.

They are probably looking for an unacceptable value or just not that committed.

Don’t worry about it.

You’ll reduce time spent on tyre-kickers so it’s a positive outcome.

As I said the likelihood of you getting one of these calls from a buyer out of the blue are increasing all the time.

Be warned, and be ready! And call me if you want to talk.

Michael