The Risks and Benefits of Testing the Waters with Potential Buyers

When and how you sell your business can sometimes be as important as what you are selling.  Setting the stage for success requires a well-thought-out strategy or you risk experiencing an extended period of distractions and frustration.  One approach is to start accepting incoming inquiries from potential buyers (or in some circumstances reaching out to a couple of the most obvious buyers) to gauge their level of interest, however, this strategy can create a lot of future challenges if not handled with care.

Before you reach out to potential buyers to test the waters or accept those inbound inquiries beyond a simple acknowledgment, it is important to define your objectives. 
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If you are trying to simply gauge the degree of interest in your business by opening a dialogue and sharing some details about your operations, be sure to communicate your objectives to the potential buyer.  Some buyers will get frustrated very quickly if they feel like you are not a serious seller and are just testing the market.  Others may not be interested in spending any time having a dialogue unless they know you are ready to get into serious negotiations.  However, if you articulate that you may be open to a deal under the right circumstances in the future, most will be honest with you about how interested they may be, based on sharing some preliminary information under an NDA.
 
Taking this approach can also be a way to explore the mutual strategic fit and build a strong relationship.

Of course, it also might generate one or more preliminary offers.  The caution here is that there can be a long and bumpy path between an initial offer and a closed deal.  It is not uncommon for buyers to start high with vaguely defined terms and whittle the offer down as detailed discussions progress.  This is particularly true when they perceive that there are no other active discussions underway with other potential buyer candidates.

Another caution is that some buyers will express a high degree of interest until it gets down to the “brass tacks” on value.

It is best to leave discussions on value alone unless you are very interested in selling and very serious about closing a deal with a specific buyer.  These discussions should be reserved for only the very best buyers under the most ideal conditions (fit, relationship, etc.).
If your primary objective is to test the waters to get a sense of the value of your business, you need to exercise extreme caution.  Soliciting offers without a clear intent to sell, or when value expectations are unrealistic, can create ill will with potential buyers and may limit your buyer prospects in the future.  If your goal is to gain an understanding of value, the last approach you should take is to “tease” the business with buyers.  A much better approach is to work with an experienced M&A advisor that knows your industry, the market, and the buyers to give you an estimate of a value range.

Private business owners routinely underestimate the time and effort it takes to close a sale and are often unprepared for the inevitable roller coaster ride, particularly if they have never sold a business before.  Even when your market test seems to generate a lot of strong interest, you are best to take a step back, get ready by preparing the business for the due diligence process, and work with an M&A Advisor to effectively position the business to create competition between buyers.

Going out into the market and sequentially talking to potential buyers one by one is probably the worst strategy to deploy.  In rare cases, it may make sense, but in many circumstances, it can “contaminate” the deal and make it very difficult to close any transaction if it proceeds beyond one or at the most two potential buyers.
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The lesson here is to have clearly defined objectives before opening up any one-to-one dialogue with any potential buyer.  Exploring their degree of interest and the mutual fit without discussing value can be an effective setup for a successful close.  Testing the market for value is usually a bad idea and sequentially trying to find the right buyer, can be a recipe for disaster except under the rarest of situations. 

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