Page 8 - NBIZ Magazine February 2024

PART 2

What Should You Do with All Those

Unsolicited Offers to

Buy Your Business?

By Patrick Ungashick

his is Part 2 of a three-part article series. In Part year-to-date. Do not sign and submit the NDA until you
1 of this series, it examined how one should have these reports available, up-to-date, and specifically
handle the stream of inquires that he/she may formatted to share with a potential third-party buyer.
Treceive about potentially selling one’s business. Many owners will not have these reports already format-
We also discussed how to conduct an introductory call ted in the necessary manner, so let’s examine that issue.
with an inquirer if one decides to investigate that oppor-
tunity, including important mistakes to avoid and infor- STEP 2A: Review the financial reports to remove any
mation you should gather. Finally, an explanation of how overly sensitive information that may be visible, such as the
to ask the potential buyer to send a non-disclosure agree- names of specific customers, distributors, vendors, lenders,
ment (NDA) if one wishes to continue the discussion with or employees. Rename or redact any protected information.
that party. From this point, let’s look at the next steps.
STEP 2B: Make sure that the income statement shows
STEP 1: Engage a mergers and acquisitions (M&A) the company’s adjusted EBITDA. If you are 100% certain
lawyer to review the NDA on one’s behalf. Too many that the company financial report accurately shows the
business owners skip this step because NDAs appear short adjusted EBITDA, then you can proceed to Step 3 below.
and harmless. Do not make that mistake. A small legal bill If one’s company has not historically tracked adjusted
can protect you and your company against big potential EBITDA (and many companies do not), or if one is not
problems later. Use a lawyer who is an M&A specialist. fully certain about what constitutes adjusted EBITDA and
M&A is a highly specialized legal field. Just as one would how to calculate it, keep reading.
not ask a general practitioner medical doctor to do heart In many situations, potential buyers will typically
surgery, do not ask a general-purpose attorney to do M&A first look to a company’s adjusted EBITDA to determine
work. Your M&A lawyer will review the NDA and, if neces- their interest in acquiring that company and at what
sary, recommend edits. NDAs are usually not contentious, price. EBITDA stands for Earnings Before Interest, Taxes,
so if this potential buyer becomes difficult to work with on Depreciation and Amortization. Contrary to popular
the terms of the NDA, then you might have just learned perception, EBITDA does not calculate a company’s profit-
that it’s time to conclude discussions with this party. ability. However, buyers put such importance on EBITDA
because it shows the company’s current earnings power.
STEP 2: Getting an M&A lawyer to approve the NDA is Many owners do not regularly calculate EBITDA while
usually simple compared to this step. Before you submit operating their company, instead focusing on revenue
the signed NDA, one must be ready to provide the poten- and profits. Yet for most buyers, EBITDA is the first and
tial buyer with the information they are going to ask for. most important step in determining what they will pay
In most cases, your potential buyer will immediately ask for a company.
for financial reports starting with the company’s previous If that’s EBITDA, then what is adjusted (also described
three to five years’ income statements and balance sheets, as “normalized”) EBITDA? Like many business owners,
and additionally the company’s current financial results one might not always make decisions that maximize his/

8 NBIZ ■ FEBRUARY 2024