The Unsolicited Offer: What to Do?
So you’ve received an offer to purchase your business. Perhaps a competitor asks you to lunch and casually broaches the subject. Or a vendor makes an overture to acquire your company. Maybe a business broker calls and has a client that wants to make an offer to purchase your business.
As a valuation firm, we see this scenario all the time. More often than not, we receive a call from the seller trying to figure out what to do.
Here’s our battle plan.
Step 1: Slow Things Down
There is no hurry right off the bat, regardless of what the buyer tells you. Is the offer only good until midnight? Rarely true. Is the buyer looking at other companies as well? I’m sure they are. But before being pushed to negotiate on terms, it’s time to take a step back, understand the bigger picture… and then engage in negotiations.
Step 2: Understand Your Valuation
In good conscience, you cannot negotiate the sale of your company without understanding the actual value of the business. This is an indisputable fact. You would not negotiate to sell your house without a basic understanding of its potential value. You would not go to the dealer and trade in your car without first knowing its value. It is genuinely impossible to negotiate without understanding your value effectively.
Understanding the value of your company sets up a great playbook:
- Is the value acceptable? Great. Proceed to the next step.
- Is the value lower than you either hope or need? You have some work to do. You’ll probably want to take a realistic look at how much time it will take to get to your “target value” and lay in a plan to get you there.
Get this step right. Retain a valuation firm that you trust that is certified and that can detail and explain your company’s value.
Step 3: Understand Their Ability to Purchase
Once you are ready to negotiate, the buyer will request financial statements. They’ll want to review your numbers to do their valuation. At the same time, it’s entirely reasonable to understand their ability to consummate the sale. Do they have cash on hand for the purchase? Other investors? Will they require a bank loan? Ask.
Tip: If you work with a good M&A intermediary, they often will help you through this screening process.
Step 4: Go Shop
There’s an old saying in the M&A world “One buyer is no buyer.” Business sales are tricky business. There’s a good chance that the first buyer through the door won’t be the actual buyer- in fact, statistics show that less than 20% of companies sell on their first effort. You have a moment of opportunity before signing an LOI (which will likely contain a “no shop” provision) to go look for other buyers.
A reasonable buyer will understand your desire (and responsibility to shareholders) to seek the best valuation possible for investors. The best practice is to structure a competitive process so you (or your M&A Advisor) can negotiate the best price and terms amongst multiple parties. Once you sign the LOI, though, you lose leverage. To get the most out of this step, you must negotiate the best deal possible in the LOI, as the price only goes down from there!
Step 5: Speed Things Up
Once you have decided to move forward with a deal, it’s time to speed things up. Time kills deals. By having your business in order, documents prepared for due diligence, and a reasonable transaction attorney retained, you can maintain momentum in your transaction and push the deal to a successful close.