Following up on the recent episode on whether you should be considering that offer to sell your firm, David provides four questions to get answered, two documents to sign, and a short list of materials that can help you take the lead in early conversations with a buyer.

Links

”Should You Entertain That Acquisition Offer?”

Transcript

Blair Enns: David, today we're talking about what to ask, share, and sign when a buyer expresses interest. I haven't counted, but this is three or four or five in a series on selling your firm. You've got selling your firm on your mind.

David C. Baker: Yes, I wonder why I'm talking about that. It's such a mystery.

Blair: Maybe you've written a book about it. Maybe you're in that business.

David: Maybe we closed a $10.2 million deal Friday, and that's on my mind-

Blair: Oh, wow.

David: -for a client.

Blair: That explains one of the drinks I had this weekend. It was in your honor.

[laughter]

Blair: Celebrating with you.

David: When to ask, share, and sign when a buyer expresses interest, or if your college kid wants to listen to this, then it's like when somebody expresses interest in you. Didn't somebody tell us the other day that we needed to support his kid's school fundraising thing? He wrote to us, remember? He said, "You need to send me money for my school soccer team because my dad makes me listen to your podcast episodes on drives to our soccer game."

Blair: I remember. We won't say the full name, but shout out to Paul.

David: Yes. Oh, that was great. Of course, I sent money to the kid.

Blair: Paul's kid. One of our clients, your client, my client, their kid starts hitting us up for donations. For the listener, neither of us gave him any money. Don't try this at home. Wink, wink.

David: Thank you for that disclaimer.

Blair: We previously talked about whether or not you should be open to possible acquisitions. We'll post the link in the show notes, or you could just scroll down your feed to two episodes before, it's in there somewhere. My takeaway from that episode was this message that even if you don't think you're selling, part of your brain, a very small part of it should be tuned to the cues, should be partially listening for the cues or the clues that somebody is subtly suggesting that maybe you might want to sell your business to them.

David: Yes, because it might actually happen, but even if it doesn't, the main point of that exercise is you'll learn some things in that process that, as long as you don't let yourself get distracted, you can't learn in any other way. It's a good idea to do it. I feel like, "Well, if I'm going to tell you to do it, maybe I should tell you what kinds of questions to expect, what questions you're going to need to ask, and what should you sign and when, and what should you share?" I don't want to throw you to the wolves. This is part two of that whole series, really.

Blair: Let's start with the questions that you should ask. You've listed four of them. The first one is, "Why are you looking to buy a firm at all?" Is it, "Why us?" or is it, "Why are you undertaking this at all?"

David: "Just why this process? What leads you to think that an acquisition makes sense, because there's lots of other ways to do it? You could merge, you could grow. What's driving this?" There's some obvious reasons why you would ask this question, which I don't even need to repeat. There's a hidden one in here, and that's that you want to understand what the reason is, because you may need to use that later if this actually does go somewhere. If somebody says, "Hey, well, yes, great question. There's a bunch of reasons, but the main reason is we really want a presence in Austin. We're a dev shop. We want a presence in Austin. It'll make it easier to recruit and so on."

Then, six weeks later, while you're being grilled right before you sign the LOI, they keep hammering you with your low EBITDA. Then you say, "Hey, folks, remember why you wanted us? We're still in Austin."

[laughter]

David: That's the first question, "Why are you undertaking this?" Just because you need to understand all the reasons. It gets them talking, and that's the key here. They'll often share more than they should, but really, you want to file this away.

Blair: Under future leverage, when they come back to you and say, "Hey, well, oh, we thought you're performing at this level on this metric, et cetera," and you point out, "Well, we're still in Austin."

David: They also don't know a lot about you at this point. You may decide whether or not you even want to pursue this, because if what they identify as their primary reason for buying you isn't a good match for you, say maybe it is 20%, "We want to add to our EBITDA, we're looking for a firm," and like, "Well, we've had eight for the last two years in a row," then you can just save your time. There's lots of reasons. That's the first question., "Why are you undertaking this?" Undertaking, that sounds formal. What's a better way? "Why are you doing this?" I'll just restate that.

Blair: "Why are you looking to buy a firm at all?" They give you the reason. "Well, we want to expand our presence or have a presence in Austin." Then the follow-up question is, "Well, why us? There are lots of firms in Austin. Why are you approaching us specifically?"

David: Yes. "What struck you about us?" Again, this may not match reality, because they probably just asked around, they've looked at your website, obviously, they may know something about you because they met or something. This is an expansion of that first question. You filed it away because it might be something in your pocket that you can use later in negotiating. The other thing you're trying to surface here is to figure out how sophisticated they are. If they list all kinds of reasons that are not all that strategic, then you know, "Oh, should I keep pursuing this or not?"

"Why an acquisition and why us specifically?" You're looking for a pattern. Do they have a strategy? Is there a specific reason for this acquisition as a whole? Then why are they filling that hole, that gap, with a firm like ours? Why us specifically? They're going to answer this question because it's pretty easy to answer. The third one is a little bit harder. This is where you make them a little bit nervous.

Blair: Yes. So far, these four questions that you ask somebody, these are reminding me of the context questions that we might ask in a qualifying conversation. Qualifying conversation, you get an inbound inquiry, "Hey, can we have a chat about us working together?" You get on a Zoom call with them, and your questions basically mirror this, "So why are you doing this, number one?" They state the reason. "Why us specifically?" Then your third question, "Who else are you talking to about an acquisition?" The same question you would ask under the decision-maker quadrant in the qualifying conversation.

You want to find out, "Is this a competitive sale? Are you talking to somebody else? If so, who else are you talking to?" You make the point here in your notes that they're not necessarily going to answer that question, but you should ask it anyway.

David: Yes. There's no way they'll answer that question. It gives you too much leverage. Plus, if they're serious, they're under an NDA and can't do that anyway. It's a mutual NDA. I've always wondered, in a sales context, would they answer that question? The answer is yes. Sometimes they do. Sometimes they'll come right out and tell you who they're talking to. I love those scenarios.

Blair: It's amazing the questions that will get answered if you ask with authority, "Who else are you talking to?"

David: Yes, long pause. You got to be willing to pause, too. They're not going to tell you who it is, but here's what you're looking for. You might even jump in and say, "I know you can't tell me. I know you can't be specific. Really, what I'm asking is, describe the other firms for me. How big are they? Not where they are necessarily, but how big are they? What kind of work do they do? What's their mix of service offerings and so on?" All you want to know is if there is some pattern in the request, because if they're talking to an SEO firm somewhere of six people, and they're talking to a 60-person SEM firm, then those are very two different things.

You just want to know if these people are sufficiently sophisticated to have a specific goal in mind about size, type of firm, service offering design, maybe where they are, and so on. "Who else are you talking to? Hey, I know you can't really tell me, but just describe the other firms that you're pursuing."

Blair: Your fourth question is another good qualifying question, too, in some cases, which is like, "Have you ever done this before?" The way you framed it is, "Can you tell me about your previous experience in the acquisition market? Have you bought f