We continue to post chapters from our upcoming ebook guide, How to Sell an Online Business, to help business owners prepare for a sale. In this fifth chapter, we look at how to engage with business buyers toward a signed Letter of Intent.
5. Bringing Buyers to the Table
With the most likely buyers identified, the next step is to bring them to the table. Institutional buyers, whether competitors, investors, or aggregators, may be easily reached through a targeted outreach. Individual entrepreneurs, however, may need to be identified with broad-based marketing efforts on marketplaces and through other channels. If your most likely acquirer is an individual entrepreneur, think through the skills that are required to run and grow the business, perhaps developing a profile like that touches on key characteristics.
Your Business Buyer Profile
Ideal buyer profile for an outdoor gardening blog:
- gardening enthusiast
- content writer
- photo editing skills
- adept with social media
- WordPress experience
- SEO blogging skills
- Affiliate ad knowledge
Similar to advertising for a job opportunity, your marketing can highlight points from this profile to ensure you are attracting the right individuals. Additionally, the skills required might inform where you advertise. For example, attracting a buyer like the above might include marketing on gardening sites. In any case, you will likely want to take a multi-channel marketing approach that could include:
- Business broker site (if you are working with a broker)
- Direct confidential inquiries through email/phone
- Online marketplaces
- Social media
- Local ads
- Industry-specific ads
As you begin to engage with buyers, your goal should be to maintain multiple dialogs simultaneously, and to create buyer competition. Some brokers achieve this by setting dates for each stage. For example, “all prospective buyers must submit an indication of interest by February 1”. This approach can help the seller maintain control and keep buyers moving forward. As you think through your marketing plan, decide whether this approach makes sense for your business, and if so, determine the timeline and due dates so you can communicate them to buyers.
For this approach to be effective, however, you will need to be ready to share your marketing and diligence materials with a business buyer. One effective way to manage this stage is to set up an online data room. There are numerous online options including iDeals, Citrix, and Datasite – or you can simply use DropBox or Google Drive. You should expect a buyer and their team to look at (partial list):
- Company information and ownership
- 2-5 years of financials and bank statements
- 2-5 years of tax returns
- List of inventory (if applicable)
- Customers with % of revenue
- Suppliers with % of revenue
- IP and tech assets
- Any legal issues
- Accounts receivable & payable
- Website metrics
After initial meetings and sharing basic company and financial information, buyers may begin to make offers on the business. Offers may come as a high level “term sheet” or “indication of interest”, or a more comprehensive “letter of intent”. Once offers have been received, it is your (and your broker’s) job to vet and respond to them.
Term Sheet/Indication of Interest
A Term Sheet or IOI is generally a high-level, bulleted summary of the offer. Points conveyed may include purchase price, payment terms, any personal guarantees, specifics on the assets or stock being purchased, handling of accounts receivable, accounts payable and inventory at close, specifics on any non-compete or consulting arrangements, specifics on any property or other leases (or purchases), and any conditions to the offer. The purpose of the document is to provide a simple, non-binding summary of how a buyer plans to approach a deal.
Letter of Intent
An LOI may follow, or be presented in lieu of a Term Sheet/IOI. A Letter of Intent is generally a more formal, legal document reviewed by an attorney and signed by both parties. LOIs are typically non-binding, and they generally include an “exclusivity” provision. So, once a prospective seller signs the document, they may be prohibited from talking with other buyers for a period that generally falls between 30 and 120 days.
Building Rapport with a Business Buyer
It’s best to manage buyer’s expectations right from the start, particularly if there is a significant discrepancy between an offer and the price and terms you are willing to accept. In-person meetings or video conferences are generally better alternatives to phone, text, or email when addressing sensitive topics.
It can be helpful to involve a third party when reviewing and responding to offers. Involving a third party will help you to maintain a strong, cordial relationship with buyers while at the same time making a case for a more favorable deal. Individuals with whom you work with should have relevant backgrounds, present themselves professionally, and be able to articulate your position in a respectful way.
Purchase price is just one component of an offer. Deal terms, too, significantly impact the attractiveness of a proposal. Is the buyer seeking seller financing or performance-based compensation? Are you required to stay on for a lengthy transition? Is the buyer proposing a stock purchase or an asset purchase, and how will that impact your net after taxes? Work with your team to understand all elements of any offer received so you can compare and assess which are workable. Some key negotiation principles that might be useful.
- Develop a game plan
- Focus on interests, not positions
- Use objective material to make your case
- Avoid emotional responses
- Identify areas of mutual interest
- Work toward a win-win result
Before signing an LOI, it makes sense to do some background research on the prospective buyer. Perhaps the simplest way to assess financial capability is to ask the buyer to provide specifics on how they plan to fund the purchase. For an individual buyer, this might mean showing you a bank statement or letter from the individual’s CPA.
For an institutional buyer, it might mean providing detail on their fund size and status, and/or specifics on past transactions. It can also be a good idea to request a credit report for the buyer. You can request a credit report through Experian, Equifax or TransUnion. In some cases, it might also make sense to conduct a full background check to assess whether there exists any criminal or litigation history.
If you are fortunate, you will receive multiple offers and have the leverage to push back on unfavorable deal points. Try not to burn any bridges along the way, so you can maintain as many options as possible.
Quick Answer takeaways:
- Pursue a variety of outreach strategies.
- Create a data room for buyers to access your key info.
- Don’t dismiss an offer out of hand if it is within your ballpark of acceptance.
- Build rapport with a potential buyer to improve the outcome.
- Make sure the buyer has the funds to close and look into their background.
Learn how to assist a buyer with due diligence and what closing documents will be needed in the next and final chapter of the Seller's Guide.
Images from Pixabay