Guide: Responding to an Unsolicited Buyer

Summary

Who it's for

Business owners who have been approached by a buyer without planning to sell.

What happens next

The buyer usually sends a request for information (RFI) and uses your answers to decide what to offer.

The common mistake

Sending only what was asked for, which leaves the buyer to interpret the numbers on their own.

A better approach

A short cover note that points out the growth and lower risk in your numbers.

When a Buyer Gets in Touch

Many business owners aren't planning to sell when the phone rings from a potential buyer. A competitor, a larger company or an investor gets in touch and says they are interested in buying your business.

This post explains what usually happens next, the common mistake we see sellers make, and a simple step that can make a real difference to the price you are offered.

How a Sale Normally Works

A typical sale

In a typical sale, the owner hires a business broker or M&A advisor (M&A stands for mergers and acquisitions). The advisor prepares the sale documents and presents the business in the best possible light. Their job is to make sure buyers see the full value of what they are buying.

A direct approach

When a buyer comes to you directly, you do not have that person in your corner. The buyer is running the process, and they are the one deciding what information matters.

What Is an RFI?

After the first conversation, a buyer will usually send you a list of questions. This is called an RFI, which stands for request for information. The buyer uses your answers to form a view of your business and decide what they are willing to offer.

A typical RFI asks about things like:

• Your financial results for the last three to five years
• Your staff, including key people and how long they have been with you
• Your product or service mix and what each part earns
• Your customers, suppliers and any major contracts

Before you spend time on it, ask yourself whether the buyer is serious and has the money to complete a purchase. If they are, then how you answer the RFI is worth getting right.

The Common Mistake: Just Answering the Question

Most owners we speak with simply hand over what was asked for. One of the most common requests is for the last three to five years of financial statements, so they send the financial statements and nothing else.

There is nothing wrong with that. The information is accurate and it answers the question.

The problem is that it leaves the buyer to interpret the numbers on their own, and the buyer has no reason to interpret them in your favour.

As a seller, you should always be on the front foot. That means showing the buyer the strengths of your business rather than hoping they will find them.

A Better Approach: Add a Cover Note

When we represent a seller who has been approached directly, we do not just pass on the financial statements. We review them and write a short cover note that sits on top. The cover note points out the parts of the numbers that make the business more attractive to a buyer.

A cover note does not need to be long. One or two pages in plain language is usually enough. It simply makes sure the buyer cannot miss the things that add value.

What Buyers Value Most

When we write a cover note, we focus on two things that drive the price a buyer is willing to pay:

Growth and opportunity

Is there room for the business to keep growing after the sale? A buyer will pay more for a business with a clear path to bigger profits.

Lower risk

How likely is it that the earnings will continue once you leave? The lower the risk, the more the business is worth.

An Example

Here is what that looks like when you are responding to a request for financial information. What to point out, and why a buyer pays more for it:

• Revenue split by product or service: shows the buyer exactly where the money comes from and which parts are growing.
• Recurring revenue (contracts, subscriptions, regular repeat orders): income the buyer can count on next year is worth more than one-off project work.
• How long customers have stayed with you: customers who have been with you for many years are likely to stay after the sale.
• Low customer churn (few customers leaving each year): less risk that sales drop once you hand over the keys.
• Growth opportunities you have not yet chased: gives the buyer a clear path to grow the business after they take over.

For example, two businesses might each make $1m in sales. If one earns most of that from customers on ongoing service agreements who have stayed for ten years, and the other relies on one-off projects that need to be won again each year, the first business is typically worth more. The financial statements alone will not always make that difference clear. A cover note will.

Why the Buyer Will Not Point This Out for You

It is never in a buyer's interest to highlight the strengths of your business and then offer more than they need to.

A buyer wants to pay a fair price, but from their side a fair price is the lowest one you will accept.

So unless you show these strengths yourself, alongside your answers to the basic questions, it is unlikely you will see any lift in the offer. In many cases, the cover note is the difference between an offer based on the bare numbers and one that reflects the true value of your business.

Get Help If You Need It

Being approached by a buyer is a great sign that your business has value. Just remember that the way you answer their questions shapes the offer you receive.

Where to Start

If you have been contacted by a buyer and are not sure how to respond, we are happy to have a confidential chat about your situation. You can also start with a free, confidential appraisal.