How to Evaluate a Proposed Business Acquisition

You have your business, but for whatever reasons you now need to sell it: you have a buyer interested enough that they’ve sent you their Letter of Intent, but are you truly ready to sign on the dotted line? 

You first need to get in touch with your attorney, accountant, and any co-founders or board of directors who should be involved and discuss the six main components that should be in the letter: 

1. Who is the buyer?

Before you even get as far as what they’re proposing, you need to think about who they are, both in terms of the person you’re dealing with and the company they represent.

  1. Whose name is on the letter? Especially if it’s unsolicited, you’ll want to make sure you’re dealing with the CEO, or someone else higher-up, or someone with enough authorization in order to avoid any possible problems later on.
  2. Is the company big enough and stable enough to have the finances to complete the transaction?
  3. Why do they want your company? Are they looking to expand by acquiring a similar company, or are they just destroying competition?
  4. If you aren’t looking to sell completely and want to remain a part of the company, could you see yourself working for them?

2. What type of transaction is it?

There are two types of transaction, both of which mean different things when it comes to the length of the process and the tax implications involved.   

  1. If you are the sole owner, it will be an asset sale; the buyer will buy the valuable tangible and intangible assets, including equipment and trademarks and incorporate them into their own company. The seller will be left with the legal entity and all the debts and other liabilities tied to it. This type of sale benefits the seller as it requires less due diligence and benefits the buyer as it limits their liability.
  2. If the company is an LLC or corporation you have a choice between an asset orentity or stock sale. An entity sale or stock sale is the sale of the assets together with the legal entity of the company and the liabilities attached to it; the right choice for a seller who wants nothing more to do with the business.

3. Payment: how much and how?

An offer less than your asking price isn’t necessarily a deal breaker; often the buyer or seller will start by quoting a price higher or lower than what they really want with the expectation that there will be negotiations. When calculating the lowest price you’re willing to accept, you need to take into account that the worth (value) of the company will always be higher than the actual amount (price) you’ll receive after debts have been paid off.  

Once you know how much you’ll be receiving there’s the matter of how; cash is preferable but rare, and you may find it comes in the form of equity shares in the acquiring company or some other intangible form. Your accountant will tell you whether you’re being offered enough to match the offer.

4. What are the conditions?

The buyer is likely to have conditions that will affect the sale and how much they’re willing to pay; how many assets they’re left with after debts are paid and how much those assets are worth, will contribute to the fair market value. If you find their conditions to be fair, consider what your own conditions are:

  • How and when do you want employees to be told about the sale?
  • Do you have loyal employees that you would like to keep their jobs for as long as possible?
  • Do you have a personal relationship with any loyal customers that you’d like to take to your next venture?

5. The timetable for due diligence

The due diligence is when the buyer will fully investigate you to ensure that they’re getting what they think they’re getting. They have three objectives in mind:

  1. To check their valuation assumptions.
  2. To see how the new combined company will save costs or raise revenue.
  3. To see if there’s anything that might reduce the purchase price.

There are three things that you need to consider:

  1. Is the timeline reasonable? The due diligence for a small business assets sale can take less than a month, while a larger company sale will take around two or three months. If there’s an exclusivity agreement preventing you from entertaining other offers during this period, you won’t want it to go on too long.
  2. If it’s unreasonable, try to see if you can find out why: they may be waiting for something to happen in one of the companies or the market, and that something may affect on the sale.
  3. Be aware of what’s happening to your information; they expect you not to entertain other offers, and you should expect them not to share your information with anyone other than their advisors.

6. The schedule

This can take between 45 to 60 days or more commonly 90 to 120 days; as well as a close date, key milestones will be scheduled for the receipt of the due diligence, purchase and sale agreement and employment and/or non-compete agreements.

7. What is your BATNA?

As good as it is to get an offer, you don’t want to take the first offer you get if you might be able to do better: that better option is your BATNA, or Better Alternative To a Negotiated Agreement. There are three steps:

  1. What are the actions you might take if there’s no agreement?
  2. From those ideas, develop the practical ones.
  3. If there is something better than what can be negotiated with the buyer, consider doing that instead.

8. What is expected of you during and after the sale?

The sales process is a long one, and even though you and your board are involved in it, your employees and customers won’t necessarily have as much time to get used to the idea. You need to consider different ways to help the buyer and how you can help make things run more smoothly - and if what they’re suggesting is reasonable to your loyal employees and customers. Consider:

  • Is the offer nonbinding?
  • Do you have the option to cancel?
  • Do they expect you to run the business as usual while it’s closing?
  • Would they like you to stick around for a few weeks to help with training, assuring loyal customers, etc.?
  • If you’re planning to start a new business, are they suggesting a non-compete period?

See also: How to Evaluate a Business for Sale

Have you ever bought or sold a business? Do you have any further tips to add? Let us know in the comments section below.

Selling your business? How to negotiate a purchase offer
You received a Letter of Intent, now what?
Best Alternative To a Negotiated Agreement