Q: I am the owner of a small business that provides niche products to regional manufacturers. I maintain a friendly relationship with a much larger competitor, and we refer business back and forth based on our product offerings. As I will be facing retirement, I would like to approach him about possibly purchasing my business, but I don't want to appear desperate-particularly since I do not have to sell immediately. I am also afraid of not getting the best offer for my business. Do you have any suggestions?

A: You are astute to the fact that the best way to ensure you get the maximum price for your business is to 1) sell when you do not have to sell, and 2) sell when there is more than one buyer at the table. You have addressed the first point (the fact that you do not need to sell), giving you a stronger foothold in negotiations. However, the second point is important as well. Keep in mind that you may not necessarily want to initiate the sales process with a buyer when your only other option is to hold on to the company. Approaching several buyers at the same time to create an auction process can give you even more leverage, resulting in higher value.

If you are seriously evaluating your exit strategy at this time, you may not want to limit your universe of buyers to only one. By actively marketing your business through a professionally managed process, you will be able to accurately gauge market interest, bring a number of potential buyers to the table, and create a bidding process to get the best offer for your business. You can choose either to utilize an intermediary (business broker or investment bank, depending on the size of your firm), or market the business yourself. Having a third party involved to represent your firm often lends credence to the marketing effort through the fact that you have hired an expert to sell your firm-an indication that you're taking this venture seriously. Your competitor's interest in purchasing you may be piqued simply by the fact that if he doesn't purchase you, he may soon be facing a larger competitor. A process managed by an intermediary is conducted confidentially and professionally and should achieve the best overall results for you-whether the ultimate offer is from your competitor or from another buyer.

If you remain convinced that your competitor is the best buyer, make sure you have prepared yourself for the process before initiating discussions with him. At the very least, you may want to think about obtaining a valuation for your business. A valuation provided by an experienced, knowledgeable third party would provide you with a good benchmark against which to gauge offers. Retaining an intermediary to help you with negotiations with your competitor may not be a bad idea either, even in the absence of multiple buyers. Again, the hiring of an expert may make your competitor think twice before he puts forth a lowball offer or unreasonable terms. In addition, an intermediary will be able to guide you through the mergers and acquisitions process-from the instatement of a nondisclosure agreement (NDA) to help in structuring a transaction. You will want to consult with your financial advisor before entering into the negotiation process as well to gain an understanding of potential tax issues related to deal structure options.

Once you have armed yourself with information, including the valuation, proper advisors and knowledge of your personal tax situation, you can approach your competitor. If you are concerned about his response and/or a leak of information, you may be able to test the waters through a conversation about future exit strategies. Perhaps you can approach him with the angle that you are planning your exit strategy in the next five to seven years, and you're wondering whether he may be interested in purchasing your firm at that time. In this manner, you can broach the subject without creating an air of immediate need. If conversations proceed beyond cursory levels, make sure you obtain a signed NDA before revealing too much about your business.

Loraine MacDonald is director of advisory services at USBX, an investment banking firm specializing in the mergers and acquisitions of small to midsized businesses. She has been involved in the valuation and sale of privately-held businesses for over ten years.


The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.