After the lunch plates were cleared, the man across the table turned to me in a hushed voice and asked his most important question: “Have you ever thought about what your company might be worth?”
Like most business owners, I had indeed contemplated this question, but I hesitated to reveal my number.
The man was the head of business development for a large multinational advertising agency, and he was on a fishing expedition to see if I would be interested in selling my company – and if he could get it for a bargain.
As a business owner, you’ve probably had similar encounters. But how do you deal with someone interested in buying your company who wants you to make the first move by putting a number on the table?
One of the most basic rules of negotiation is to never be the first to name a starting price. If you do, you could leave money on the table, or turn off a prospect before you even start the dance.
Fortunately, there is a formal document you can request from would-be suitors that forces them to put their number – or at least a range – on the table first.
The document is called an indication of interest (IOI) and is typically the first piece of formal correspondence between a potential acquirer and a business owner.
An IOI will include things like a general price range (for instance, $4-million to $6-million) or a multiple of earnings before interest, taxes, depreciation and amortization, or EBITDA (say, four to five times); a rough guideline of due diligence requirements, deal structure and currency (cash versus stock, etc.); and any general plans to retain you and your key managers.
The less formal IOI differs from the more formal letter of intent (LOI) in a couple of important ways.
An LOI – although usually non-binding – typically includes most of what is in the IOI but goes further to specify:
- A price or multiple.
- A specific earn-out agreement for you and your managers.
- The working capital to be left in the business at closing.
- The deal structure and currency to be used, in detail.
- A due-diligence checklist of items the acquirer needs to verify before closing.
- A “no shop” clause, which, once you sign, forbids you from negotiating with another buyer while the acquirer conducts diligence.
Fortunately for you, both the IOI and LOI are documents that professional buyers understand and regularly use.
There is no need to be the first to name a price. If you find yourself being asked for your number over a quiet lunch, don’t feel obligated to react.
Just let your suitor know you’d be happy to review an IOI or LOI. A serious professional buyer will know what you’re looking for, and will be happy to oblige.
Special to The Globe and Mail
John Warrillow is a writer, speaker and angel investor in a number of start-up companies. He writes a blog about building a valuable – sellable – company. He is the author of Built To Sell: Creating a Business That Can Thrive Without You, which will be released in April.